Performance review. Telkom is aggressively building on the strengths of its fixed-line network in South Africa and growing its presence in Africa

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1 Five year operational review 108 Operational review 109 Chief of finance s review 139 Five year financial review 146 Financial review 147 Telkom Annual Report 2008 Performance review Telkom is aggressively building on the strengths of its fixed-line network in South Africa and growing its presence in Africa Performance review

2 FIVE YEAR OPERATIONAL REVIEW for the years ended March CAGR (%) Fixed-line operational data Fixed access lines (thousands) 4,680 4,726 4,708 4,642 4,532 (0.8) Postpaid PSTN 3,048 3,006 2,996 2,971 2,893 (1.3) Postpaid ISDN channels Prepaid (3.5) Payphones (4.9) Fixed-line penetration rate (%) (1.5) Revenue per fixed access line (ZAR) 5,341 5,250 5,304 5,275 5,250 (0.4) Total fixed-line traffic (millions of minutes) 32,942 31,706 31,015 29,323 26,926 (4.9) Local 20,547 19,314 18,253 14,764 11,317 (13.9) Long distance 4,616 4,453 4,446 4,224 3,870 (4.3) Fixed-to-mobile 3,980 3,911 4,064 4,103 4, International outgoing International VoIP Interconnection 3,347 3,524 3,654 3,740 3, Subscription based calling plans 1,896 2,997 n/a Managed data network sites (1) 9,061 11,961 16,887 21,879 25, Internet dial-up subscribers (1) 142, , , , , Internet ADSL subscribers (1) 8,559 22,870 53,997 92, , ADSL subscribers (1) 20,145 58, , , , Calling plan subscribers 62, , , Fixed-line employees 32,358 28,972 25,575 25,864 24,879 (6.4) Fixed lines per fixed-line employee (1) Excludes Telkom internal services. 108 Mobile operational data Total mobile customers (thousands) 11,217 15,483 23,520 30,150 33, South Africa Mobile customers (thousands) 9,725 12,838 19,162 23,004 24, Contract 1,420 1,872 2,362 3,013 3, Prepaid 8,282 10,941 16,770 19,896 21, Community services Total inactive mobile customers (%) n/a Contract n/a Prepaid n/a Mobile churn (%) Contract (4.8) Prepaid Mobile market share (%) Mobile penetration (%) Total mobile traffic (millions of minutes) 12,172 14,218 17,066 20,383 22, Outgoing 7,647 9,231 11,354 13,638 15, Incoming 4,525 4,987 5,712 6,745 7, Mobile ARPU (ZAR) (8.3) Contract (6.4) Prepaid (8.9) Community services 2,155 2,321 1, (24.8) Average MOU (8.9) Contract (10.1) Prepaid (4.8) Community services 3,061 3,185 2,327 1, (26.7) Cumulative network capital expenditure per customer (ZAR) 1,720 1,515 1,257 1,187 1,239 (7.9) Number of mobile employees 3,848 3,919 4,305 4,727 4, Number of mobile customers per mobile employee 2,527 3,276 4,451 4,867 5, Other African countries Total mobile customers (thousands) 1,492 2,645 4,358 7,146 9, Lesotho Tanzania 684 1,201 2,091 3,247 4, Democratic Republic of Congo 670 1,032 1,571 2,632 3, Mozambique , Churn (%) Lesotho (27.7) Tanzania Democratic Republic of Congo Mozambique Gross connections (thousands) Lesotho Tanzania ,353 2,092 2, Democratic Republic of Congo ,688 2, Mozambique Penetration (%) Lesotho Tanzania Democratic Republic of Congo Mozambique ARPU Lesotho (12.6) Tanzania (21.3) Democratic Republic of Congo (20.8) Mozambique (28.3) Number of employees 761 1,074 1,154 1,522 1, Lesotho Tanzania Democratic Republic of Congo Mozambique Number of mobile customers per mobile employee 1,961 2,463 3,776 4,695 4,

3 OPERATIONAL REVIEW HISTORY AND DEVELOPMENT OF THE COMPANY Telkom was incorporated on September 30, 1991 as a public limited liability company registered under the South African Companies Act No. 61 of 1973, as amended. Registration number: 1991/005476/06 The company s principal executive offices are located at: Consortium was considering making an offer for the entire issued share capital of Telkom, subject to a number of conditions, including, among other things, confirmation by the Telkom Board that Telkom would unbundle its entire 50% stake in Vodacom as part of the offer. Discussions with Vodafone commenced on May 14, 2008, and are independent from the approached received from the consortium. Telkom Towers North 152 Proes Street Pretoria 0002 Gauteng Province South Africa Telephone number: +27 (0) Website address: Historical background Prior to 1991, the former Department of Posts and Telecommu - nications of South Africa exclusively provided telecommu - nications and postal services in South Africa. In 1991, the Government of South Africa transferred the entire telecommu - nications enterprise of the Department of Posts and Telecommunications of South Africa to a new entity, Telkom, as part of a commercialisation process intended to liberalise certain sectors of South Africa s economy. Telkom remained a wholly state-owned enterprise until May 14, 1997, when the Government of South Africa sold a 30% equity interest in Telkom to Thintana Communications LLC, a strategic equity investor beneficially owned by SBC Communications Inc. and Telekom Malaysia S.D.N. Berhard. On March 7, 2003, we completed our initial public offering and listing on the JSE and NYSE, pursuant to which the Government of South Africa sold a total of 154,199,467 ordinary shares, including 14,941,513 ordinary shares through the exercise of an over-allotment option. Recent developments Non-binding proposals received Telkom has made a decision to invest in the built out of a fixedwireless and mobile data network. Telkom is currently limited in its ability to pursue or provide full mobile services in South Africa and sub-saharan Africa by the provision of the Vodacom joint venture agreement with Vodafone. On July 15, 2008, Telkom issued a further cautionary statement that its discussions with Vodafone and independently with the consortium are still ongoing and shareholders are advised to continue to exercise caution when dealing in Telkom securities. Telkom s Board does not intend to consider disposing of Telkom or any of its subsidiaries, joint venture or assets without compelling strategic rationale. There can be no assurance that Telkom will ultimately elect to divest of its interest in Vodacom or the structure or the ultimate value to Telkom and its shareholders of its Vodacom interest, or that Telkom s mobile strategy will change or that it will be successful in pursuing any new mobile opportunities. Senior management With effect from November 1, 2007, Telkom revised its top management structure to better match the company s current business needs. The revised structure is designed to facilitate faster decision-making and more effective execution, smoother integration of various operating entities, and to ensure that multinational and wholesale customers are better served through appropriate channels. On November 22, 2007, the Board announced the appointment of Reuben September as Chief Executive Officer. In appointing the CEO, the Board followed a rigorous evaluation process including international benchmarking and consultation with the Department of Communications, the latter a requirement specified by Telkom's articles of association. In addition, on November 1, 2007, Motlatsi Nzeku was appointed as Chief of Operations, Thami Msimango as Chief of Global Operations and Subsidiaries, Charlotte Mokoena as Chief of Human Resources and Ouma Rasethaba as Chief of Corporate Governance. Additionally, Deon Fredericks was appointed acting Chief of Finance on November 1, 2007, and Naas Fourie was appointed as Chief of Strategy on April 1, Telkom Annual Report On May 30, 2008, Telkom received a non-binding proposal by a wholly-owned subsidiary of Vodafone Group Plc to acquire a portion of Telkom's stake in the Vodacom Group, subject to, among other things Telkom distributing its remaining stake in Vodacom to Telkom shareholders. Separately, on May 30, 2008, Telkom received a letter from a consortium comprising Mvelaphanda Holdings (Pty) Ltd, affiliated funds of Och-Ziff Capital Management Group and other strategic investors (the Consortium), stating that the In June 2008 Alan Knott Craig announced his decision to step down as CEO of the Vodacom Group, effective from September 30, He is expected to remain as consulting CEO until the end of the 2009 financial year. Mr Pieter Uys has been appointed Chief Executive Officer of the Vodacom Group effective from October 1, At the end of the 2008 financial year, Leon Crouse ended his term as Chief Financial Officer of the Vodacom Group. Johan van der Watt is currently acting Chief Financial Officer of Vodacom.

4 Operational review continued OPERATIONAL REVIEW Overview Our fixed-line segment is our largest business segment and includes our fixed-line voice, data and Internet businesses. Telkom s fixed-line services comprise: Fixed-line subscription and connection services to postpaid, prepaid and private payphone customers using PSTN lines including ISDN lines, and the sale of subscription based value-added voice services and customer premises equipment (CPE) rental and sales; Fixed-line traffic services to postpaid, prepaid and payphone customers including local, long distance, fixed-to-mobile, international outgoing and international Voice over Internet Protocol (VoIP) traffic services; Interconnection services, including terminating and transiting traffic from South African mobile operators and international operators, as well as transiting traffic from mobile to international destinations; and Fixed-line data and Internet services, including domestic and international data transmission services such as point to point leased lines, ADSL services, packet based services, managed data networking services, as well as Internet access and related information technology services. Products and services Subscriptions and connections Telkom provides postpaid, prepaid and private payphone customers with digital and analogue fixed-line access services including PSTN lines, ISDN lines, and wireless access between a customer s premises and our fixed-line network. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access channels. Each ISDN line transmits signals at speeds of 64 Kbps per channel. Subscriptions to ADSL are included in our data services revenue. We were the first fixed-line operator globally to provide a prepaid service on a fixed-line network. Our prepaid service offers customers an alternative to the conventional postpaid fixedline telephone service. All costs including installation, telephone equipment, line rental and call charges are paid in advance, eliminating the need for monthly telephone bills. We target our prepaid service mainly at first-time residential customers who do not have sufficient credit history, and are located in areas where we can provide access to our network without significant additional investment. Customers who have previously had their telephone service disconnected due to non-payment are also encouraged to migrate to our prepaid service option in order to reduce future non-payments while satisfying demand for our services. In the 2007 financial year we introduced Waya Waya, our most affordable fixed-line offer yet. Existing customers are required to pay R120 in advance to cover line rental for a period of one year, thereby ensuring that our customers stay connected. Telkom also offers a broad range of value-added voice services on a subscription or usage basis including call forwarding, call waiting, conference calling, voic , toll-free calling, ShareCall which permits callers and recipients to share call costs, speed dialling, enhanced fax services and calling card services for payphones. These services complement our basic voice services and provide us with additional revenue while satisfying customer demand, enhancing our brand and increasing customer loyalty. Value-added voice services such as our CallAnswer voic service are also bundled with value-added calling plans such as Telkom Closer, to further enhance the value of these services to our customers. We provide payphone services throughout South Africa. As at March 31, 2008, Telkom operates approximately 138,344 public payphones and approximately 4,538 private payphones, of which approximately 41% are coin-operated and combination payphones, and the remainder being card-operated payphones. The following table presents information regarding our postpaid and prepaid lines as well as payphones as at the dates indicated, excluding our internal lines: 110 As at March 31, / /2007 (in thousands, except percentages) % change % change Postpaid PSTN (1) 2,996 2,971 2,893 (0.8) (2.6) Business 1,412 1,426 1, Residential 1,584 1,545 1,464 (2.5) (5.2) Prepaid PSTN (6.9) (6.5) ISDN channels Payphones (2) (4.2) (10.1) Total fixed-access lines (3) 4,708 4,642 4,532 (1.4) (2.4) (1) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre. (2) Includes public and private payphones. (3) Total fixed-access lines are comprised of PSTN lines including ISDN channels, prepaid lines, ADSL lines and public and private payphones, but excluding internal lines in service. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access channels.

5 The following table presents information related to the number of fixed-access lines in service, net line growth and churn for the periods indicated. Churn is calculated by dividing the number of disconnections by the average number of fixed access lines in service during the period. As at March 31, / /2007 (in thousands, except percentages) % change % change Opening balance 4,726 4,708 4,642 (0.4) (1.4) Net line growth (18) (66) (110) (266.7) (66.7) Connections (7.0) (13.1) Disconnections (633) (638) (607) 0.8 (4.9) Closing balance 4,708 4,642 4,532 (1.4) (2.4) Churn (%) (2.2) Connections include new line orders resulting primarily from changes in service and, to a lesser extent, new line roll-out. Disconnections include both customer-initiated disconnections and Telkom-initiated disconnections. Included in disconnections and churn are those customers who have terminated their service with Telkom and subsequently subscribed to a new service with Telkom as a result of relocation or change of subscription to a different type of service. and long-distance calls subject to a minimum charge, as well as reduced rates to selected international destinations and pure per second billing for fixed to mobile calls since August Telkom Closer 4 All the benefits of Telkom Closer 3 bundled with DSL 384. Value-enhancing bundles During the year under review Telkom continued to focus on offering value for money by launching and continuously enhancing packages such as PC bundles and Telkom Closer, including the following: Telkom Closer 5 All the benefits of Telkom Closer 3 bundled with DSL Telkom Closer plans 1 to 3 have an option to purchase 150 or 75 local Internet hours during call more time. Telkom Closer 1 Includes line rental, Call Answer, a minimum flat-rate charge for calls during off-peak time up to one hour, a discounted per record rate for local and long-distance calls subject to a minimum charge, as well as 30 free local minutes during standard time introduced since August In addition, with effect from August 2008, this package includes 60 free local Internet minutes during off-peak time. Telkom Closer 2 Includes line rental, Call Answer, unlimited free calls during off-peak time up to one hour, a discounted per record rate for local and long-distance calls subject to a minimum charge, as well as 30 free local minutes during standard time introduced in August In addition, with effect from August 2008, this package includes 60 free local Internet minutes during off-peak time. Telkom Closer 3 Includes line rental, Call Answer, 1,000 inclusive free peak-time minutes, unlimited free calls during off peak time up to one hour, a discounted per second rate for local The Closer packages have performed exceptionally well, with the usage base increasing by 69.4% to 451,122 plans. Subscriptions to the supreme call packages, targeted at the small, medium and micro enterprise (SMME) segment, have increased by 149.2% to 12,916. Telkom continues to be successful in tying in large corporate customers to term and volumes discount plans. During the year under review R3.4 billion worth of term and volume discount plans were sold. Annuity revenue streams, which exclude line installations, reconnection fees and CPE sales, have increased by 14.1% to R6.9 billion. Telkom will seek to continue converting traditional revenue streams to annuity revenues. This will mainly be done through bundling call minutes with access line rental in attractive subscription based value propositions, an important strategy for delivering greater value to our customers. Pricing is a key element of the value proposition and our pricing strategy is aimed at improving our competitiveness in areas where competition is expected to intensify and where arbitrage opportunities exist. Telkom s strategy to counter pricing pressures is as follows: Actively offer value based calling plans and bundles to extend value and savings to our customers; Telkom Annual Report

6 Operational review continued Reduce international and long distance rates to reduce arbitrage opportunities; Rebalance standard/off-peak local rates, to better align these with international norms and improve our competitive position; and Reduce and rebalance national and international data prices to improve our competitive position. Despite these campaigns, Telkom s fixed-line base declined by 2.4% in the 2008 financial year and 1.4% in the 2007 financial year. The decrease in the number of subscriber lines was mainly in the lower revenue generating areas such as prepaid PSTN lines and residential postpaid PSTN lines, partially offset by an increase in ISDN channels and business postpaid PSTN lines. The higher revenue generating areas, such as business lines, showed a positive growth of 0.2% in the 2008 financial year and 1.0% in the 2007 financial year. The decrease in the number of residential postpaid PSTN lines was primarily as a result of customer migration to mobile and higher bandwidth products such as ADSL and lower connections, while the decrease in prepaid PSTN lines was primarily as a result of customer migration to mobile services and our residential postpaid PSTN services to enable access to subscription based calling plans. The decline in prepaid services in the 2008 financial year was offset in part by Waya-Waya, which accounted for approximately 32.5% of prepaid services as at March 31, The increase in ISDN channels and ADSL services was primarily driven by increased demand for higher bandwidth and functionality. This, together with the alignment of the residential and business DSL product and the upgrading of DSL 192 to DSL 384 without any additional cost to customers, has added to the positive growth in ADSL services. ISDN services grew by approximately 5.0% in the 2008 financial year, mainly due to Telkom s primary rate service which grew 9.5%, while the basic rate service declined 3.2%. We also offer telecommunications equipment rentals and sales such as telephones and private branch exchange (PABX) systems, as well as related post-sales maintenance and service for residential and business customers in South Africa. The market in South Africa for such equipment and systems, commonly known as customer premises equipment (CPE), is characterised by high competition and low profit margins. We believe, however, that the supply and servicing of CPE is an essential part of providing a full service to our customers. Traffic minutes Pure voice or traffic revenue remains the largest contributor to fixed-line revenue. Traffic revenue decreased 4.7% to R15.9 billion contributing 49.0% to fixed-line revenue. This decrease is largely as a result of continued fixed to mobile substitution and price decreases. The following table presents information regarding our fixed-line traffic minutes, excluding interconnection traffic, for the periods indicated. We calculate fixed-line traffic by dividing fixed-line traffic revenues for the particular category by the weighted average tariff for that category during the relevant period. Year ended March 31, 2007/ /2007 (in millions, except percentages) % change % change Local (1) (2) 18,253 14,764 11,317 (19.1) (23.3) Long distance (1) (2) 4,446 4,224 3,870 (5.0) (8.4) Fixed-to-mobile 4,064 4,103 4, International outgoing International VoIP (54.2) 13.2 Subscription based calling plans (2) 1,896 2, Total traffic 27,361 25,583 23,031 (6.5) (10.0) 112 (1) Local and long distance traffic includes dial-up Internet traffic. (2) Traffic from subscription based calling plans has been reclassified from local and long distance traffic into a separate line item in the 2007 and 2008 financial year. Traffic from subscription based calling plans was not reclassified in the 2006 financial year. Traffic was adversely affected in both the 2008 and 2007 financial years by the increasing substitution of fixed-line calls with mobile services, dial-up Internet traffic being substituted by our ADSL service, the decrease in the number of prepaid and residential postpaid PSTN lines, as well as increased competition in our payphone business. The decrease in international VoIP traffic in the 2007 financial year is primarily due to the relocation of the international call centre business by one of our customers outside South Africa.

7 The following table sets forth information regarding interconnection traffic terminating on or transiting through our network for the periods indicated. We calculate interconnection traffic, other than international outgoing mobile traffic and international interconnection traffic, by dividing interconnection revenue for the particular category by the weighted average tariff for such category during the relevant period. Fixed-line international outgoing mobile traffic and international interconnection traffic are based on the traffic registered through the respective exchanges and reflected in international interconnection invoices. Year ended March 31, 2007/ /2007 (in millions, except percentages) % change % change Domestic mobile interconnection traffic 2,299 2,419 2, Domestic fixed interconnection traffic 113 n/a International interconnection traffic 1,355 1,321 1,280 (2.5) (3.1) Total 3,654 3,740 3, The increase in domestic mobile interconnection traffic in the years ended March 31, 2008 and 2007 was primarily due to an overall increase in mobile calls as a result of growth in the mobile market, partially offset by increased mobile-to-mobile calls bypassing our network. Domestic fixed interconnection traffic includes traffic from Neotel, USALs and VANS. International interconnection traffic decreased in the 2008 financial year due to a decrease in volumes as a result of loss of volumes to Neotel, Sentech, the USALs and illegal operators terminating traffic in the country. International interconnection traffic decreased in the 2007 financial year due to a decrease in international switch hubbing traffic. Tariff rebalancing Telkom made significant progress in rebalancing its fixed-line tariffs. Our tariff rebalancing programme was historically aimed at better aligning our fixed-line traffic charges with underlying costs and international norms. Telkom expects that its tariff rebalancing in future will focus more on the relationship between the actual costs and tariffs of subscriptions, connections and traffic in order to more accurately reflect underlying costs, and in response to increased competition. Regulations under the Telecommunications Act, which remain in effect, impose a price cap on a basket of Telkom s specified services including installations, prepaid and postpaid line rental, local, long distance and international calls, fixed-to-mobile calls, public payphone calls, ISDN services, our Diginet product and our Megaline product. A similar cap applies to a sub-basket of those services provided to residential customers, including leased lines up to and including lines of 2 Mbps of capacity and the rental and installation of business exchange lines. Approximately 64% of Telkom s operating revenue for the year ended March 31, 2007 was included in this basket, compared to approximately 57% in the year ended March 31, Our tariffs for these services are filed with ICASA for approval. The price cap operates by restricting the annual percentage increase in revenues from all services included in the basket that are attributable solely to price changes to annual inflation, measured by changes in the consumer price index, less three and a half percent. Historically, the annual permitted percentage increase in revenues from both the whole basket and the residential sub-basket was 1.5% below inflation. Effective from August 1, 2005 through July 31, 2008, the annual permitted increase in revenues from both the whole basket and the residential sub-basket was lowered to 3.5% below inflation, and ADSL products and services have been added to the basket. In addition, the price of no individual service within the residential sub-basket can be increased by more than 5% above inflation except where specific approval has been received from ICASA, and pursuant to the Electronic Commu - nications Act, revenue generated from services where we have significant market power may not be used to subsidise competitive services. Early in 2008, ICASA commissioned a review of the existing price control regulations applicable to Telkom, however, ICASA has not initiated the statutory public process of reviewing the existing regulations. Telkom is awaiting communications from ICASA in respect of proposed timelines for the review. ICASA approved a 3.0% reduction in the overall tariffs for services in the basket effective September 1, 2005, a 2.1% reduction in the overall tariffs for services in the basket effective August 1, 2006 and a 1.2% reduction on its regulated basket of products and services effective August 1, On June 20, 2008, Telkom filed with ICASA proposed average price increases on its regulated basket of products and services of 2.4% as a result of inflation increases, effective August 1, The price control formula would have permitted Telkom to apply for a 17.2% price increase due to the high consumer price index in South Africa and excess carryover of lower price increases for prior periods. Our tariffs are subject to approval by the regulatory authorities. All tariffs include value added tax (VAT) at a rate of 14%. Data Leased lines A large number of leased lines are provided to the mobile operators at negotiated wholesale rates for the build-out of their networks. With the growth in traffic carried on the mobile networks, a need was identified for the deployment within these networks of transmission links with speeds higher than the 2 Mbps Telkom Annual Report

8 Operational review continued provided by existing agreements. We entered into broadband fixed link leasing agreements with Vodacom and MTN in the 2004 financial year and with Cell C in the 2005 financial year. These agreements have been enhanced over time, and we currently provide broadband links at speeds of 45 Mbps, 155 Mbps and 622 Mbps, and anticipate that we will soon be providing links at speeds of 2.5 Gbps. Formalised service level agreements as well as term and volume based discount structures, as a counter to the competitive challenges that are occurring in this area of the business, have been implemented. These agreements have been enhanced over time, and we anticipate that we will soon be providing links at speeds of 45 Mbps, 155 Mbps and 622 Mbps. Agreements and term and volume based discount structures have been put in place as a counter to competition challenges that are occurring in this area of the business. Recognising the increasing threat of competition in the provision of leased lines to the mobile operators, Telkom introduced further discounting structures in the 2007 and 2008 financial years to enhance the attractiveness of Telkom s product offerings to this rapidly growing market. Fixed-link leasing agreements were also entered into with some of the smaller operators, including VANS and USALs, as well as with Neotel. Vodacom and MTN have both indicated that they intend to self-provide some of the leased lines, which they require for the build-out of their networks, as an alternative to leasing from Telkom. We are currently negotiating improved leased line prices with the mobile operators in order to retain revenue from leased lines. The following table indicates the bandwidth capacity of our Diginet, Diginet Plus, ATM Express and broadcasting data transmission services: Leased line Diginet Diginet Plus ATM Express Bandwidth 2.4 Kbps to 64 Kbps 128 Kbps to 2 Mbps 2 Mbps to 155 Mbps Broadcasting Analogue audio Analogue video Digital 7.5 or 15 KHz 70 MHz 2 Mbps to 155 Mbps Managed data networking services Our managed data networking services combine our data transmission services discussed above with active network management provided through our state-of-the-art national network operations centre. We offer a wide range of integrated and customised networking services, including planning, installation, management and maintenance of corporate-wide data, voice and video communications networks, as well as other value-added services such as capacity, configuration and software version management on customers networks. To support our service commitment, we offer guaranteed service level agreements on a wide range of our products, which include guaranteed availability, or uptime, of the network through the use of our national network operations centre. Our managed data networking services include our customer network care service, which facilitates the network management of all our data transmission services using the leased lines or packet based services discussed above, and our Spacestream and IVSat products, which are satellite based products. Spacestream is a high quality, flexible satellite networking service that supports data, voice, fax, video and multimedia applications, both domestically and in the rest of Africa. Managed data networking services are billed on a monthly basis and vary by customer depending on the particular services provided and the number of network sites under management. The following table presents information regarding the number of managed network sites for each of our managed data networking services as at the dates indicated. 114 Year ended March 31, 2007/ / % change % change Terrestrial based 9,492 12,905 17, Satellite based 7,395 8,974 7,875 (1) 21.4 (12.2) Total managed network sites 16,887 21,879 25, (1) Satellite based managed network sites declined during the 2008 financial year as a result of Uthingo, the South African lottery operator, losing its licence to operate.

9 Telkom s focus on bringing new innovative products to the market that cater for increased data usage and converged services has resulted in our new VPN products gaining increased traction in the market. We have increased VPN sites by 58% to 12,741. Our new VPN Lite products, which are delivered over the ADSL network, include advanced self-help and online charging solutions. This product was launched during November Telkom is in the process of building on a culture of research and innovation and fast time-to-market, in order to cater for customers who are increasingly looking for innovative, easy to use products. The following table indicates our product offerings as at March 31, 2008: DSL DSL DSL Downstream speed Up to 384 Kbps 512 Kbps 4096 Kbps Upstream speed Up to 128 Kbps 256 Kbps 384 Kbps The ADSL Self Install option is expected to continue to improve the installation times. As at March 31, 2008, 57% of all ADSL installations were done through the Self Install option. Broadband and Converged Services Telkom is aggressively expanding its ADSL footprint, increasing the bandwidth offered in order to host applications such as video services and using the Next Generation Network (NGN) to facilitate innovative solutions. The ADSL footprint now covers 92% of Telkom s total network and our coverage in underserviced areas has increased to 76%. ADSL subscribers grew 61.2% to 412,190, excluding Telkom internal lines. We fell short of our aggressive target of 420,000. Nevertheless, this strong growth was achieved through the commoditisation of ADSL, Do Broadband, the Self Install Option, DSL port automation and wholesale services. Do Broadband packages increased by 245.6% to 119,288. Wholesale ADSL services grew to 18,722. Telkom remains committed to achieving our targeted ADSL penetration of 15 to 20% of fixed access lines by the end of the 2011 financial year. This will continue to offset the decrease in access lines which have decreased by 2.4% to 4,531,752 access lines. ADSL services ADSL allows provisioning of high speed connections over existing copper wires using digital compression. We have different ADSL services available, aimed at the distinct needs of our customers. In an attempt to simplify our DSL offering and to increase value to customers, we have aligned the residential and business DSL product offerings and upgraded all DSL 192 customers to DSL 384 without any additional cost to customers. In extending and complementing our ADSL footprint, Telkom has increased its WiMAX base stations from 27 sites at September 30, 2007 to the current 56 sites. Telkom remains committed to its target of 71 WiMAX base stations. Internet access services and other related information technology services Telkom is one of the leading Internet access providers in South Africa in the retail and wholesale Internet access provision markets. We also package our TelkomInternet product with personal computers, ADSL and ISDN services, as well as our satellite access products, SpaceStream Express and SpaceStream Office. Our South African Internet exchange (SAIX) is South Africa s largest Internet access provider, offering dedicated and dial-up, ADSL and satellite Internet connectivity to Internet service providers and value-added network providers. SAIX has offered fixed-line network Internet access through dial-up service since SAIX derives revenue for its access services primarily from subscription fees paid by Internet service providers and valueadded network providers for access services. In order to grow the portfolio, an opportunity has been identified to develop a service targeted mainly at night-time users of the SAIX ADSL service. These customers can be regarded as heavy users as they use the service mainly for games, music and movie downloading. The SAIX customer base has expanded beyond service providers and value-added network providers, and now includes Vodacom and other operators in Africa. These include incumbents in Mozambique, Namibia, Angola, Zimbabwe and Lesotho. Telkom Annual Report 2008 The following table presents information regarding our wholesale and retail Internet services and customers as at the dates indicated: 115 Year ended March 31, 2007/ / % change % change Wholesale Internet leased lines-equivalent 64 Kbps 16,832 19,247 22, Dial-up ports 12,889 11,462 7,010 (11.1) (38.8) Retail Internet dial-up subscribers 228, , ,732 (8.1) 15.3 Internet ADSL subscribers 53,997 92, ,

10 Operational review continued 116 Voice over Internet Protocol network Softswitch capability is initially being deployed as an overlay network to enable the communication of VoIP services. Our current VoIP network terminates calls for numerous international voice carriers into our fixed-line network. Call centres from around the world that have relocated to South Africa due to favourable economic conditions and lower resource costs are also hosted on our VoIP network. Telkom has points of presence for connectivity to the VoIP network in Amsterdam, London, New York, Ashburn (Washington D.C.), Hong Kong, Zambia, Zanzibar, Tanzania, Senegal and Madagascar. The network can terminate 69 media gateways, or approximately 32,700 voice circuits. The media gateways compress the traditional voice channels of 64 Kbps to 8 Kbps channels thus enabling us to reduce the cost of international calls, while maintaining the perceived voice quality of a 64 Kbps call. WiFi In February 2005 Telkom launched a hot spot service that provides wireless data access through b/g WiFi technology. Any user with a wireless-enabled notebook computer or personal digital assistant can connect to the service while in the coverage area. WiFi is mainly targeted at restaurants, hotel groups, major shopping malls and some sites on national routes. At March 31, 2008 Telkom has 237 hotspots, up from 75 at March 31, WiMAX Telkom has launched services based on fixed (IEEE ) WiMAX technology. This technology is a standard based broadband wireless access technology that provides throughput connectivity in a point-to-multipoint configuration. The technology is designed to enable Telkom to complement its ADSL service offering in peri-urban and rural areas, and in areas where ADSL services are not yet available. Telkom is also pursuing the provision of a voice service to complement the broadband service offering and a trial is currently in progress. If successful, this will be used to provide services in areas where Telkom experiences problems with the fixed-line copper network due primarily to thefts and breakages. Telkom has a memorandum of understanding in place with Intel Corporation for the interchange of information pertaining to WiMAX, in order to keep pace with the latest WiMAX developments. Telkom is a member of the WiMAX Forum and actively monitors the Forum for any developments. Geographic Expansion and other operations Telkom aims to establish itself as a regional voice and data player through providing a range of hosting services, managed solutions, mobile voice and wireless broadband services. We are also entering the field of management consulting to operators. In addition, we are positioning Telkom as a wholesale facilities and infrastructure enabler for regional incumbents. Our expansion to date has been through Multi-Links, a private telecommunications operator operating in Nigeria and Africa Online, an Internet services provider with its head-office in Kenya and operating in eight other African countries. Our other operations segment provides directory services through our TDS Directory Operations Group, fixed mobile, data and other international communications services in Nigeria through our newly acquired Multi-Links subsidiary, Internet services outside South Africa through our Africa Online subsidiary, and wireless data services through our Swiftnet subsidiary, and includes Telkom Media and the Telkom Management Service Company which will provide consulting and management services in South Africa and Africa. TDS Directory Operations and Swiftnet were previously included in our fixed-line segment. TDS Directory Operations Telkom owns 64.9% of TDS Directory Operations, the largest directory publisher in South Africa providing white and yellow pages directory services and electronic white pages. During the 2008 financial year, TDS Directory Operations published approximately 2,460 million white, 2,078 million yellow and 3,375 million combined directories. TDS Directory Operations also provides electronic yellow pages and value-added content through full-colour advertisements. TDS Directory Operations has improved the accessibility and distribution of directories through door-to-door delivery and electronic media. We also provide national telephonic inquiries and directory services. The remaining 35.1% of TDS Directory Operations is owned by Maister Directories (Pty) Ltd. On January 23, 2007, TDS Directory Operations acquired a 100% shareholding in a shell company and subsequently renamed it TDS Directory Operations (Namibia) (Pty) Ltd, which provides directory services in Namibia. On October 31, 2007, TDS Directory Operations sold a 25% interest in TDS Directory Operations (Namibia) (Pty) Ltd to Ripanga Investment Holdings (Pty) Ltd, a black economic empowerment partner in Namibia, for two million Namibian dollars. TDS Directory Operations capital expenditure was R42 million in the 2008 financial year, as the company sought to continue expanding access and distribution into new markets. TDS Directory Operations invested in a new online platform in order to combat declining revenue from printed products. TDS Directory Operations primary competitors for print materials include Caxton, Easy Info and Brabys. TDS Directory Operations primary Internet competitors include Yahoo, Google and Ananzi, as well as vertical search capabilities such as Auto Trader and Supersport. TDS Directory Operations estimated market share as at March 31, 2008 is approximately 9% with respect to print media, and approximately 11% with respect to Internet directory services. TDS Directory Operations had 610 employees as at March 31, 2008.

11 Multi-Links With effect from May 1, 2007, Telkom acquired 75% of Multi-Links Telecommunications Ltd (Multi-Links) in Nigeria for USD280 million (R1,985 billion). The remaining 25% of Multi- Links is owned by Kenston Investment Ltd, an investment company based in the Isle of Man in the United Kingdom. Multi- Links is a private telecommunications operator with a Unified Access Licence allowing fixed, mobile, data, long distance and international telecommunications services focused primarily on corporate clients in Nigeria. due to logistical difficulties. The average revenue per user (ARPU) achieved for the 11 months ended March 31, 2008 was USD32. It is however expected that ARPU will fall below USD30 during the 2009 financial year. In the 2008 financial year, Multi-Links build and expansion programme achieved the following: Commissioned its first Huawei packet exchange in Abuja with 300Kbps capacity; Multi-Links Unified Access Licence was granted on November 1, 2006 and has a term of ten years, with eight years remaining. There are currently nine operators licensed with Unified Access Services Licences in Nigeria, making the Nigerian telecommunications market extremely competitive as operators may use any access technology to deliver voice, data and video services to their customers. In the 2008 financial year, Multi-Links generated R845.4 million in revenue and had total assets of R2,206 million. Telkom anticipates spending USD533 million in capital expenditure at Multi-Links in the 2009 financial year. The company reported total subscribers of 262,431 at September 30, We placed an aggressive subscriber target of 812,000 for the year ending March 31, 2008 on the company. Multi-Links exceeded this target and delivered 813,392 subscribers as at March 31, At the end of May 2008, Multi-Links recorded 1,000,251 subscribers. Subscriber additions are not linear and are entirely dependant on the capacity that Multi-Links has available. Multi-Links is determined to provide all its subscribers with a premium service. Multi-Links reported revenue of R845.4 million, a loss before tax of R63.5 million and a profit after tax of R49 million due to a tax credit. The pioneer tax status ended on December 31, 2007, and the company is liable for tax of 30% and an educational levy of 2% going forward, subject to the utilisation of tax credits. Voice and data revenue contributed 81% to total revenue, handset sales 12%, interconnect revenue 6.8% and short message service (SMS) 0.2%. Operating expenses were R941.8 million with payments to other operators contributing 66%, selling, general and administrative (SG&A) expenses contributing 15%, employee expenses 4%, operating leases 4%, services rendered 2% and depreciation contributing 9%. As a result of the CDMA technology, Multi-Links subsidised handsets which was the largest contributor to SG&A expenses. New CDMA customer premise equipment allows for CDMA technology to be embedded on SIM cards which enables CDMA to work on any telephone. This is expected to substantially change Multi-Links operating expenditure going forward. The majority of new subscribers were added in late February and March 2008 as a result of equipment being delayed Extended its Lagos switch by 250Kbps capacity to 600Kbps capacity; Extended the number of towers from 91 to 223; Extended the number of base stations from 134 to 269; Established a new main network site in Gbagada, Lagos; and Added 1,300km of national backbone fibre, resulting in a total of 2,500km. Plans are underway to deploy Metro Ethernet rings in Kanu, Kaduna and the Delta region. Six NGN nodes will be built in the 2009 financial year, greatly extending Multi-Links ability to provide data products to corporate customers. In May 2008, the first South African organisation commissioned links between South Africa through Telkom and Nigeria through Multi-Links. This ability to provide end-to-end services throughout Africa is a key strength. Multi-Links expects more corporate customers to come on board in the near future. Multi-Links strategy will focus on brand awareness and promotional campaigns to increase the revenue of fixed-wireless and mobile customers, and will seek to offer easy to understand high-value bundles, differentiated by voice quality and service levels. Broadband Internet with Internet service provider services will target high value bundles. High quality Internet protocol NGN services are planned to be deployed in Lagos to attract high-end corporate users, and carrier class wholesale products and services are planned to be introduced by establishing an earth station to provide international connectivity. The prospects for Multi-Links are good and the company intends to capitalise on Telkom s brand and access to international connectivity. The resilience and quality of international connectivity provides great opportunities in servicing corporate, wholesale and retail markets. Africa Online On February 23, 2007 Telkom acquired 100% of the issued share capital of Africa Online from African Lakes Corporation, at a total cost of R150 million. Africa Online is an Internet service provider active in Cote d Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Africa Online s strategy focuses on brand development, creation and Telkom Annual Report

12 Operational review continued development of customer channels, improving network systems, human resources development and an expansion drive targeting other African countries. In the 2008 financial year, Africa Online generated revenue of R110 million, and had assets totalling R122 million. Africa Online offers wireless and fixed-line technologies, hosting and domain registration to both consumer and corporate customers. During the year under review dedicated corporate links and consumer wireless services were the highest revenue streams followed closely by dial-up business. Dial-up packages, however, are the most popular and accounted for approximately 60% of Africa Online s total customers as at March 31, Consumer wireless customers are expected to continue to grow in line with Africa Online s continued investment in infrastructure. The following table presents Africa Online s customer base as at the periods indicated: As at March 31, 2008/ % change Dial-up 11,599 8,936 (23.0) Consumer wireless 1,939 4, Unbundled local loop ADSL (14.3) VSAT Dedicated corporate Total customers 14,542 14,393 (1.0) 118 The reason for the decrease in the number of dial-up and ADSL customers is that Africa Online has shifted its marketing approach to focus on increasing the number of customers on its own wireless network infrastructure, as opposed to dial-up and ADSL networks. Africa Online s distribution is conducted through various channels including direct sales and different types of resellers depending on the customer segment. Customers are serviced through customer relationship managers and a 24-hour call centre. Africa Online s primary competitors include former telecommunications companies that have entered the Internet service provider market and other private companies. As at March 31, 2008, Africa Online s network has 31 points of presence, 46 mobile broadband transceiver stations, 25 fixed broadband wireless access transceiver stations, 13 network operation and support centres and 12 data centres across nine countries. Africa Online s capital expenditure was USD5.7 million in the 2008 financial year as compared to USD0.8 million in the 2007 financial year. The increase in capital expenditure was primarily due to the improvement of service quality and an increase in the range of ICT services offered in the market. Africa Online has 379 employees as at March 31, A new CEO, John Joseph, and a new chief financial officer, Munaff Cassim, were appointed to Africa Online during May Africa Online s footprint covers East Africa, Southern Africa and West Africa. The regulatory environments are fairly different in each of Africa Online s different regions. East Africa is liberalised and Africa Online provides services across the ICT spectrum, including VoIP services. Markets in Southern Africa are still regulated, limiting the services Africa Online can provide to its customers. West Africa is a fairly liberalised market and Africa Online is presently seeking to take further advantage of opportunities presented by this. Africa Online increased its revenue from R46 million in the six months ended September 30, 2007 to R110.0 million as at March 31, The major contributors to revenue were dialup, consumer wireless and dedicated corporate links. The decline in earnings before interest, taxes, depreciation and amortisation (EBITDA) margin is largely as a result of the Telkom management fee, payments to other operators and SG&A expenses. The company reported an operating loss of R63.2 million largely as a result of foreign exchange losses. Africa Online s infrastructure roll-out has not progressed as fast as hoped due to the long equipment lead times and unrest in Kenya during December 2007 and January However, Africa Online has capitalised on its relationship with Telkom in the pursuit of multinational clients and has 124 Pan-African multinational customers. Telkom has migrated 115 corporate VSAT sites to African Online. This migration has allowed for the joint tendering of business to large multinational customers and opened the Southern African region to Africa Online. The company is also now in a position to compete with the likes of MWEB and AFSAT. In addition to the affiliates Africa Online currently works with in Senegal, Benin, Nigeria, Angola, Botswana and Mozambique, new affiliates have been signed up in Malawi, Mauritius and Sudan including additional affiliates in Namibia, Angola and Mozambique. The company is extending its coverage across the continent to aggressively target the Pan-African corporate market.

13 Telkom Media Telkom launched Telkom Media (Proprietary) Limited as a private company intended to have a 30% black economic empower - ment (BEE) shareholding. On August 31, 2006 Telkom Media applied to ICASA for a commercial satellite and cable subscription broadcast licence. On September 12, 2007, ICASA granted Telkom Media a commercial satellite and cable subscription broadcast licence, the issuance of which is subject to the negotiation and satisfaction of certain conditions. Telkom announced on March 31, 2008, its decision to reduce its shareholding in Telkom Media substantially. Telkom will be investigating all opportunities to do this in the best interest of Telkom shareholders and all other stakeholders. Telkom confirms that it has received proposals relating to Telkom s announced intention to substantially reduce its stake in Telkom Media. No decision has been made to date and Telkom is currently reviewing the proposals and anticipates making a decision in the near future. We acknowledge that the expansion of content rich services is crucial as it will not only drive future revenue, but act as a major product differentiator in a crowded broadband market space. Content can however be sourced from other operators and Telkom is in the process of investigating options with respect to acquiring content from a number of content providers. Telkom Media has 142 employees as at March 31, Mandla Ngcobo and Lourens van Niekerk were appointed as Chief Executive Officer and Chief Financial Officer respectively. Swiftnet Telkom owns 100% of Swiftnet, which operates under the name Fastnet Wireless Service. Fastnet is a wireless network providing asynchronous wireless access on our X.25 network, Saponet-P, to its customer base. This service has been expanded by Swiftnet to include a GPRS-driven solution using a dual SIM card allowing customers to roam on both the Vodacom and MTN GPRS South African networks. Services include retail credit card and check point of sale terminal verification, telemetry, security and vehicle tracking. Swiftnet s network has 180 base transceiver stations and one base station network management centre. Swiftnet currently operates a short message service over its network that feeds back into a third party operator connected to the mobile operators. Swiftnet currently operates two sites for redundancy purposes, one in Centurion and one in Rosebank, for modem and router based services. Swiftnet has a number of regional offices nationally that manage more than 160 contractors. Customers are serviced through a tier 1 and tier 2 technical call centre as well as in-house technicians and external contractors. Swiftnet s sales team supports various retail and wholesale relationships. The company had an estimated 33% market share in the point of sale communications market based on the number of customers in the 2008 financial year, with strong competition from its three main competitors, ConnectNet, X-Link and Datalink. New services such as ADSL router services are being developed to broaden revenue streams. John Myers was appointed as CEO as of July 9, 2007, and Nokuthula Ngubeni was appointed as Chief Financial Officer as of April 4, Swiftnet has 85 employees as at March 31, Swiftnet is in breach of its licence which requires it to have at least 30% of its shares held by BEE individuals or entities. ICASA has required Swiftnet to remedy this breach in its licence, which expired on August 24, On February 14, 2007 Telkom announced that it had entered into an agreement to sell a 30% stake in Swiftnet to the Radio Surveillance Consortium, a group of empowerment investors, for R55 million following a competitive sale process run by an independent adviser. The transaction would not have required any financial support or facilitation from Telkom. The transaction received Competition Commission approval on May 28, 2007, but was not approved by ICASA. Swiftnet is currently seeking black economic empowered individuals or entities who would be acceptable to ICASA. With regard to shareholder issues, ICASA indicated that there is currently no agreement within the industry as to acceptable BEE shareholding percentages for all licensees. ICASA indicated that the shareholding issue for the Swiftnet licence would need to be in line with BEE values applicable to other similar licensees. Swiftnet met with ICASA on January 28, 2008 to discuss its specific licence terms and conditions. Swiftnet has submitted its comments on the draft licence terms and conditions to ICASA that ICASA sent to Swiftnet during October Swiftnet, assisted by Telkom as its sole shareholder, has had a further meeting with ICASA on February 27, It was decided that the draft amended licence that ICASA sent to Swiftnet during October 2007 would not form the basis of the conversion process, but instead the original licence issued to Swiftnet in August 1995 would be used as the basis for licence conversion. The transaction is still subject to ICASA approval. Other developments Telkom Management Services Company The Telkom Board has approved the establishment of the Telkom Management Services Company (TMSC). Opportunities exist in sub Saharan Africa for a reputable and acknowledged telecommunications operator to provide telecommunications management services. The target markets for such services are: State owned incumbent operators in sub Saharan Africa; and Numerous new entrants into the ICT industry, including green field entrants that need operational expertise to scale up and be effective operators. There is a need for consultants in the ICT industry with relevant expertise and support from reputable telecommunications operators that understand the African operational environment and are able to provide such services. Telkom Annual Report

14 Operational review continued 120 It is envisaged that TMSC will be a wholly-owned subsidiary providing the full range of strategic and operational services. Its relationship with Telkom holds advantages in terms of expertise in technology innovation and integration, independence from equipment manufacturers, experience of a large number of supplier platforms as well as firsthand experience in transforming from a state-owned monopoly, through commercialisation to privatisation and listing. The management contracts of Multi-Links and Africa Online will be handled by TMSC. Fixed wireless and mobile data network Telkom has decided to utilise W-CDMA technology and has appointed Huawei as our vendor to build out our fixed wireless and mobile data network. W-CDMA technology will provide Telkom with the following benefits: Telkom will gain portable and mobile data as well as fixed and nomadic voice capability; As W-CDMA has the capability of supporting full mobility, the above services can be further augmented with mobile voice services should Telkom be successful in concluding its mobile strategy, and no longer be bound to the current shareholders agreement with Vodafone; and The technology will alleviate the negative impact of Thefts, Breakages and Incidences (TBIs) on service delivery. In order to satisfy demand for services in high theft and high maintenance areas, Telkom has acquired W-CDMA to decrease exposure to the losses being incurred. Key Next Generation Network, capacity and product developments Telkom is in the third year of its Next Generation Network (NGN) build out programme. Customer demand and global standards necessitate the provision of services and particularly bandwidth that is only possible utilising the intelligence of an NGN system. Our NGN build out achievements are as follows: An increase of the ADSL footprint to 2,660 DSLAMs, covering 92% of Telkom s existing customer footprint. South Africa is currently in the build phase, and we anticipate this to be completed during the 2009 financial year. Automatic self-healing re-routing of bandwidth on the national layer has commenced. The national and local transport network increased by 377 nodes, growing the network bandwidth by 1.2 Tbps or 21%. Total international bandwidth has increased to 4.5 Gbps or by 88%. ATM network available bandwidth on the core and metro layers has increased to a combined 147 Gbps or by 41%. National IP Network bandwidth has increased to 32.2 Gbps or by 11%. Network Interactive Voice Response Systems have been deployed which offer advanced speech services. Automated speech recognition and text-to-speech applications enable corporate customers and Telkom to enhance their voice systems. Diginet and Diginet Plus network bandwidth has increased to 27 Gbps, a growth of 20%. A total of 237 WiFi hotspots have been deployed at strategic partner locations. Fibre deployment has increased by 8.7%. IMAX has been introduced into the system and is ready to carry traffic. IMAX has the ability to carry narrowband and broadband services for wire line legacy and converged services. Telkom spent R6.8 billion on its capital expenditure programme during the year under review for the fixed-line business. It is estimated that we will spend approximately R11.3 billion in the financial year ended March 31, 2009 on both the fixed-line and other segment. Cost, efficiency and productivity management Faced with increasing competition eroding our revenue base, cost management continues to be a key element in maintaining shareholder value. A total of 84 Metro Ethernet nodes have been deployed in major cities using 10 Gigabit and 1 Gigabit line systems. The first Dense Wave Division Multiplexing (DWDM) system capable of Gbps signals over a single pair of fibre has been deployed between Gauteng and Durban. This has significantly increased transport bandwidth capability. A significant roll-out of this system between all major cities in The Telkom fixed-line business managed to contain its operating expense growth to a 3.6% increase, despite the high inflationary environment with CPIX recorded at 10.1% in March Employee expenses increased by 4.2% to R7.4 billion, SG&A expenses decreased by 1.9% to R3.9 billion, services rendered increased by 9.4% to R2.4 billion and operating leases decreased by 18.8% to R619 million. Depreciation, amortisation, impairment and write-offs increased by 4.2% to R3.7 billion.

15 Telkom did not achieve its fixed-line EBITDA margin target of 37% to 40% with the EBITDA margin at 36.3%, decreasing from 37.7% as at March 31, If the Telkom Media provision of R217 million was excluded the EBITDA margin target of 37% would have been achieved. Our continued focus on cost management, efficiency and productivity management has resulted in Telkom implementing its capability management programme. Professional services have grown globally, particularly in the information technology and telecommunications environments. This enables Telkom to focus on services that differentiate us from our competitors, including: An increased focus on customer service; Faster delivery of improved services to the market; Improving cost management and capital productivity; and Increasing shareholder returns. Furthermore, Telkom is currently consolidating its service providers to deliver network services. A critical factor in the new contract process is to ensure that Telkom moves towards a more consolidated interface with the service provider market and obtains maximum efficiencies in the areas of scale and volume. A capability management process is underway to identify partners for network operations, information technology management and TelkomDirect shops, which entails that certain elements will be outsourced to professional service providers. Telkom has commenced with issuing closed requests for proposals for professional services in this regard. To ensure that capability management, which includes elements of outsourcing, is inclusive, we are engaging with organised labour in line with transparency and labour regulations. Many interactions have taken place with union leadership over the past few months to achieve the appropriate levels of awareness, education and strategic insight on the aspects of capability management. This included international benchmarking visits to other operators and professional services providers in Germany, Australia, New Zealand and Brazil. The sustained employability and wellbeing of Telkom staff is of paramount importance. Maintaining the quality of services to our customers Improved customer service is vital to the future success of Telkom. Sustainable and profitable growth in the customer base requires creating and strengthening capabilities focused on managing customer relationships and learning from acquired customer information. This will enable Telkom to manage the customer experience and anticipate customer needs. Customer segmentation based on value should enable Telkom to understand customer equity better, in order to provide additional value and services. Understanding an individual customer s breakeven point and anticipating their future requirements will allow Telkom to intelligently determine value enhancers and cross selling opportunities. A call centre masterplan has been designed to complement customer segmentation through dedicated agents for high value customers, upfront identification and routing of complex calls to the specialised agents and upfront resolution of high volume simple calls by universal agents. This is a vital element in making it easier for our customers to do business with us. We have consolidated all call centre operations under one structure creating a single point of accountability. In addition, we have ensured redundancy through the interconnection of call centres allowing a reduction of bottlenecks and rerouting of overflow traffic. In areas of high cost, high maintenance and high theft occurrence, particularly copper and fibre theft, Telkom is deploying a wireless network using W-CDMA to restore and improve service quality. Network service quality We have made significant investments in our national network operations centre and our data centre, designed to increase our ability to identify and anticipate future customer needs more rapidly, and to provide appropriate solutions and services. In order to take advantage of economies of scale in scheduling, we have consolidated our six voice installation and fault management centres into two centres to address faults, installation and service appointment scheduling, and have consolidated our six data installation and fault management centres into two centres. Telkom Annual Report

16 Operational review continued The following table presents information regarding Telkom s service delivery measurements during the periods indicated. Year ended March 31, Residential voice % cleared in 24 hours Faults per 1,000 lines % installed within 5 days Business voice % cleared in 24 hours Faults per 1,000 lines % installed within 5 days Data subrate % cleared in 24 hours Faults per 1,000 lines % installed within 10 days ADSL business % cleared in 24 hours Faults per 1,000 lines % installed within 20 days Residential and business voice orders installed within five days and faults cleared in 24 hours declined during the year under review due to the increased focus on ADSL services. The ADSL installed base grew by 61% during the 2008 financial year and 78% during the 2007 financial year. This growth resulted in an increase in the number of reported faults and impacted on the time taken to clear faults. This growth also impacted on data sub rate services as these share ADSL resources. The increase of approximately 20% in network failures during the 2007 financial year contributed to the increased sub rate faults per 1,000 lines. Network failures consist of cable breaks, cable theft and failures on other core network elements. We implemented a self-install option for ADSL, which had a positive impact on ADSL installation. We have changed the measurements of the installation measures as indicated in the table below. The change in methodology serves to more accurately reflect the demands placed on us by customers. In addition we have differentiated between those services that require network or infrastructure build activity compared to those that can be provided by flow-through means, where no network or infrastructure build is required. This separation provides insight into how Telkom is addressing the demands of both flow-through and build instances, and provides focus on the two processes with the objective to reduce cycle times for both processes. It removes the potential masking of the one process over the other. Year ended March 31, Residential voice % installed within 28 working days initial timeframe No build % installed within 80 working days initial timeframe Build Business voice % installed within 21 working days initial timeframe No build % installed within 70 working days initial timeframe Build Data subrate % installed within 30 working days initial timeframe No build % installed within 90 working days initial timeframe Build ADSL business % installed within 21 working days initial timeframe No build % installed within 60 working days initial timeframe Build We anticipate that we will continue to change the method in which we measure performance to align with changes in the ICT industry that focus more on broadband and data services, and also to support Telkom s customer centricity drive.

17 Infrastructure and technology The following table presents information related to the digitisation and upgrade of our network at the dates indicated. As at March 31, Digitisation (% of lines) ATM switches Digital exchange units 4,321 4,339 4,427 4,448 4,463 IP routers Competition Competition in the South African fixed-line communications market is intense and is increasing as a result of the Electronic Communications Act and determinations issued by the Minister of Communications. The new licensing framework included in the Electronic Communications Act is resulting in the market becoming more horizontally layered, with a number of separate licences being issued for electronic communications network services, electronic communications services, broadcasting services and the radio frequency spectrum. This will substantially increase competition in our fixed-line business. In addition, pursuant to the Telecommu - nications Act and determinations issued by the Minister of Communications: Mobile cellular operators are permitted to obtain fixed telecommunications links from parties other than Telkom; Value-added network services (VANS) operators and private network operators are permitted to resell the telecommu - nications facilities that they obtain from Telkom; VANS operators are permitted to allow their services to carry voice traffic, including VoIP; Telkom is no longer the sole provider of facilities to VANS operators; and Licensing for the provision of payphone services has been expanded. We compete primarily on the basis of customer service, quality, dependability and price in those areas where we currently face competition and where we expect to compete for public-switched telecommunications services in the future. We intend to introduce new products and services as well as tariff structures with the aim of maintaining and gaining revenue. Mobile competition Telkom competes for voice customers with the three existing mobile operators, Vodacom, our 50% owned joint venture, MTN and Cell C. MTN is a public company listed on the JSE Limited, and Cell C entered into a joint venture with Virgin Mobile which has further increased competition. Telkom also competes with service providers who use least cost routing technology that enables fixed-to-mobile calls from corporate private branch exchanges to bypass our fixed-line network by being transferred directly to mobile networks. In recent periods, our fixed-line business has experienced significant customer migration to mobile services, as well as substitution of calls placed using mobile services rather than our fixed-line service. ICASA has initiated a review process of mobile termination rates aimed at reducing high mobile interconnect charges which, once completed, is also likely to impact Telkom s own termination rates and interconnection revenues. Data competition Telkom also faces increased competition in the data market from mobile operators, value added network operators and private network operators as a result of determinations by the Minister of Communications in September 2004 and the Electronic Communications Act, which came into effect on July 19, Neotel and VANS providers such as Internet Solutions are our main competitors in the data market. Neotel is entering the market through competitive pricing and niche products such as fibre connections and rings. VANS providers offer competitive IP virtual private networks and Internet service provider services to the business segment. Consumer orientated Internet service providers such as MWEB are our main competitors in the consumer Internet market. In addition, our data services have faced increased competition from iburst, a wireless competitor that offers competing broadband services and, to a lesser extent, Sentech, which owns and operates satellite transmission systems, a packaged, alwayson bidirectional broadband service via satellite and a wireless high-speed Internet service offering. Similarly, the mobile operators 3G, HSDPA and EDGE networks also enable customers to access the Internet via mobile broadband services, which also results in increased competition for our data services. The mobile data providers have reduced prices significantly leading to price competition in our data markets. We believe that VANS operators and Internet service providers will increasingly move into the corporate and voice services market, Telkom Annual Report

18 Operational review continued 124 while telecommunications service providers aim to expand into the managed data network and international traffic markets. We anticipate that alliances will be forged between VANS operators, telecommunications service providers and content providers to concentrate on the delivery of converged services within the next few years. Domestically, expansion into new markets by VANS and mobile companies will occur, while the development of new products and services will intensify competition. We expect competition to further increase as a result of consolidation in the market, with competitors growing through mergers, acquisitions and allianceforming activity. The entry of multinational corporations into South Africa is expected to be a further incentive for global communications operators, which already service these corporations abroad, to establish or enhance their presence in South Africa. Competition in the data market is expected to increase as a result of the VANS providers ability to deliver complex managed data solutions and integrated information communications technology solutions, as well as expected future alliances between the VANS and fixed and mobile operators. Technological advances will also enable more and more convergence and integration which in turn will enable more effective competition and usage of bandwidth. As competition increases in the South African market, South African telecommunication service providers, including Telkom, are expected to increasingly look to other developing markets for new revenue streams, particularly in sub-saharan Africa. Internationally, Telkom s new Africa Online business already competes with Internet Solutions and MTN Network Solutions. In addition, Verizon is already present in a number of other African markets. Fixed-line voice competition In September 2004, the Minister of Communications granted an additional licence to provide public-switched telecommunications services to Neotel. Neotel is 30% owned by Transtel and Esitel, which are beneficially owned by the South African Government and other strategic equity investors including 26% beneficiallyowned by TATA Africa Holdings (Pty) Limited, a member of the large Indian conglomerate with information and communications operations. On March 19, 2008 Neotel announced that the Competition Tribunal of South Africa had approved its acquisition of Transtel without any conditions. Neotel was licensed on December 9, 2005 and commercially launched on August 31, Neotel commenced providing services to large corporations and other licensees at the beginning of the 2007 calendar year to large corporations and other licensees. On April 25, 2008 Neotel announced that the first of its consumer products were available in limited parts of Johannesburg and Pretoria. Government has created an infrastructure company, Infraco, which stated that it will provide inter-city bandwidth at cost based prices to Neotel, and later to the rest of the industry. This will further compete with our existing communications network. Infraco was established by an Act of parliament: the Broadband Infraco Act, No. 33 of The Electronic Commu - nications Act, No 36 of 2005, has been amended by the Electronic Communications Amendment Act, No. 37 of 2007, to permit electronic communications licences to be issued to Infraco. A process to issue additional licences to small business operators to provide telecommunications services in underserviced areas with a teledensity of less than 5% commenced in 2005 and is continuing. The Minister of Communications has identified 27 of these underserviced areas. ICASA has issued licences to successful bidders in seven of these areas and the Minister has issued invitations to apply for licences in 14 additional areas. In August 2006 ICASA recommended to the Minister that licences be granted to successful applicants in 13 of these areas. While it was expected that further licences will be issued in the 2007 calendar year, none were issued. The Minister of Communications has issued a policy direction to ICASA directing it to, where there is more than one licence in a province, merge the licences and issue one Provincial Under-Serviced Area Network Operator (PUSANO) licence. None of these consolidated licences have yet been issued by ICASA. Telkom s fixed-line voice business is expected to be further impacted by continuing developments of Voice over Internet Protocol and by the roll-out of limited mobility services. Wireless operator iburst has started to offer portable voice services over its wireless network. Additionally, VoIP and other operators with international gateway licences are expected to create increased competition for Telkom s fixed-line voice business in carrying international traffic in and out of South Africa. We expect that the introduction of number portability and carrier pre-selection could further enhance competition in our fixed-line voice business and increase our churn rates. As competition intensifies, the main challenges our fixed-line voice business faces are continuing to improve customer loyalty through improved services and products, and maintaining our leadership in the South African communications market. As a result of increasing competition, we anticipate pressure on our overall average tariffs, a reduction in our market share and an increase in costs in our fixed-line business.

19 Our employees Fixed-line employees The following table indicates the number of full time employees in our fixed-line segment. As at March 31, 2007/ / % change % change Network and technology 19,637 19,645 17, (8.7) Marketing and sales 4,099 4,254 4, Support and other 1,839 1,965 1, Total 25,575 25,864 24, (3.8) In addition to our full-time employees, Telkom has 3,801 temporary employees as at March 31, Our employees are represented by the Communication Workers Union (CWU), the South African Communications Union (SACU) and the MWU- Solidarity Union. The Alliance of Telkom Unions (ATU) disbanded during the course of the 2007 financial year. Some of our employees also belong to other unions that are not recognised by Telkom for collective bargaining purposes, including the Postal Union, the Society of Telkom Engineers, the South African Steel and Allied Workers Union and the United Association of South Africa. As at March 31, 2008, approximately 70% of our total workforce are union members. Employee related expenses are a significant component of our total fixed-line operating costs. Fixed-line employee expenses increased 4.2% from R7.1 billion in the 2007 financial year to R7.4 billion in the 2008 financial year. The number of Telkom employees declined by approximately 31,236 positions from March 31, 1997 to March 31, 2006, increased by 289 positions in the year ended March 31, 2007 and decreased by 985 positions during the year under review. As at March 31, 2008 Telkom has a total of 24,879 employees. Telkom is a party to a collective agreement on substantive matters covering the terms and conditions of employment of its fixed-line unionised employees and other non-management employees in Telkom s bargaining unit with ATU and CWU for the period April 1, 2006 to March 31, In addition, Telkom signed a new collective recognition agreement with ATU and CWU in mid 2004, designed to enhance the relationship between shop stewards and management. The long-term substantive agreement provides for the re-opening of negotiations in the event that the consumer price index varies from the April 2006 level of 3.7% by more than 3%. Due to inflation increasing beyond this amount, Telkom re-opened the negotiations in December 2007 and thus far have not reached settlement. Given the rapidly changing economic conditions as evidenced by an increase in the consumer price index from 7.9% in December 2007 to 11.6% in June 2008, the various Trade Union Federations, notably COSATU, have requested a double-digit increase. We have received a notice from CWU advising Telkom of its intention to embark on some unspecified industrial action. Telkom had placed a moratorium on employee reductions until March 31, Our ability to achieve the planned cost reductions through capability management is further subject to our ability to outsource necessary services and source strategic partners with the necessary benefits of scale and required information, communications and technology capabilities to enable continued alignment and transformation. In particular, our outsourcing initiatives will be subject to compliance with South African labour and employment laws and successful negotiations with labour unions and our workforce. A number of South African trade unions, including the trade unions of our employees, have close links to various political parties. In the past, trade unions have had a significant influence in South Africa as vehicles for social and political reform and in the collective bargaining process. Since 1995, South Africa has enacted various labour laws that enhance the rights of employees that have resulted in increased compliance costs. These laws: Confirm the right of employees to belong to trade unions; Guarantee employees the right to strike, the right to picket and the right to participate in secondary strikes in prescribed circumstances; Provide for mandatory compensation in the event of termination of employment due to redundancy; Limit the maximum ordinary hours of overtime work; Increase the rate of pay for overtime; Require large employers such as Telkom to implement employment equity policies to benefit previously disadvantaged groups and impose significant monetary penalties for non compliance; and Provide for the financing of training programmes by means of a levy grant system and a national skills fund. We believe that investment in employee training and development is essential to implementing corporate cultural change and improving customer satisfaction. In order to improve the skill levels Telkom Annual Report

20 Operational review continued of our employees, Telkom invested R283.1 million in employee training and development during the year under review. launched a number of initiatives designed to train our employees and encourage employee retention. Leadership development continues to remain a priority, with specific focus on previously disadvantaged groups. We have Mobile employees The following table presents the number of Vodacom employees as at the dates indicated. As at March 31, 2007/ / % change % change South Africa 4,305 4,727 4, Other African 1,154 1,522 1, Total (1) 5,459 6,249 6, (1) Vodacom had a total of 732, 581 and 469 temporary and contract employees as at March 31, 2008, 2007 and 2006 respectively. Headcount excludes outsourced employees. Employees seconded to other African countries are included in the number of other African countries and excluded from Vodacom South Africa s number of employees. Vodacom is an equal opportunity employer committed to empowerment, and has developed an employment equity policy that is available to all employees. Vodacom s South African employees participation in unions was approximately 13.9% as at March 31, 2008, approximately 12.3% as at March 31, 2007 and approximately 10.2% as at March 31, Vodacom believes that the relationship between its management and its employees and labour unions is positive. Other employees The following table presents the number of employees in our other segment as at the dates indicated. As at March 31, 2007/ / % change % change TDS Directory Operations (1) Swiftnet Africa Online Multi-Links 680 Telkom Media 142 Total , (1) TDS Operations employees increased in the 2008 financial year primarily in order to expand its marketing capacity. 126

21 Mobile communications Overview Telkom participates in the South African mobile communications market through our 50% interest in Vodacom. Vodacom is the largest mobile communications network operator in South Africa with an estimated market share of approximately 55% as at March 31, 2008, based on total estimated customers. Vodacom has investments in mobile communications network operators in Lesotho, Tanzania, the Democratic Republic of the Congo and Mozambique. Vodacom s other shareholder is Vodafone, which beneficially owns 50% of Vodacom. The following table sets forth non financial operational data of Vodacom for the periods indicated. The amounts stated reflect 100% of Vodacom s customers and traffic minutes. Year ended March 31, 2007/ /2007 South Africa % change % change Total mobile customers (thousands) (at year end) (1) 19,162 23,004 24, Contract 2,362 3,013 3, Prepaid 16,770 19,896 21, Community services telephones Total inactive mobile customers (%) (at year end) (2) (3.7) Contract Prepaid (3.4) Gross connections (thousands) 9,140 10,859 12, Contract (3) Prepaid (3) 8,618 10,124 11, Community services (85.5) Churn (%) (4) Contract (3.0) (14.4) Prepaid Total mobile traffic (millions of minutes) (5) 17,066 20,383 22, Outgoing 11,354 13,638 15, Incoming 5,712 6,745 7, ARPU (ZAR) (6) (10.1) 0.0 Contract (9.6) (6.0) Prepaid (8.7) (1.6) Community services 1, (49.8) (23.6) Average MOU (7) (6.8) (4.3) Contract (8.7) (8.5) Prepaid (4.1) (2.1) Community services 2,327 1, (50.5) (23.3) Number of mobile employees (at year end) (8) 4,305 4,727 4, Number of mobile customers per mobile employee (8) 4,451 4,867 5, Telkom Annual Report

22 Operational review continued Year ended March 31, 2007/ /2007 Other African countries (9) % change % change Total mobile customers (thousands) (at year end) (1)(2) 4,358 7,146 9, Lesotho Tanzania 2,091 3,247 4, Democratic Republic of Congo 1,571 2,632 3, Mozambique , Gross connections (thousands) Lesotho Tanzania 1,353 2,092 2, Democratic Republic of Congo 892 1,688 2, Mozambique Churn(%) (4) Lesotho (14.8) (6.3) Tanzania Democratic Republic of Congo Mozambique ARPU (ZAR) (6) Lesotho (3.8) (2.7) Tanzania (22.4) (5.8) Democratic Republic of Congo (10.5) (23.4) Mozambique (22.2) 3.6 Number of employees (at year end) (8) 1,154 1,522 1, Lesotho (6.0) 54.0 Tanzania Democratic Republic of Congo Mozambique Number of mobile customers per mobile employee (at year end) (8) 3,776 4,695 4, (1.9) 128 (1) Vodacom s customer totals are based on the total number of customers registered on Vodacom s network, which have not been disconnected, including inactive customers, as of the end of the period indicated. (2) Vodacom s inactive customers are defined as all customers registered on Vodacom s network for which no revenue generating activity has been recorded for a period of three consecutive months. Vodacom s contract customers are disconnected when they terminate their contract, or their service is disconnected due to nonpayment. Up to June 15, 2006, calls forwarded to voic were regarded as revenue generating activity and such SIM cards were classified as active customers. Because a large number of SIM cards have calls forwarded to voic as their only revenue generating activity and a majority of such messages are never retrieved by the customer, resulting in estimated ARPUs of less than R1 per month, Vodacom changed its definition of active customers to exclude calls forwarded to voic from the definition of revenue generating activity effective June 15, Vodacom deleted approximately 3 million customers during the period of this rule change. As a result of the rule change, prepaid churn rates and ARPUs increased during the 2007 financial year. Vodacom subsequently changed its definition of revenue generating activity back to include calls forwarded to voic effective September 1, Such SIM cards were disconnected from the network after being inactive for a 215 consecutive day period. Since implementing this change, prepaid SIM cards remaining in an active state on the network, with only call forwarding to voic and no other revenue generating activities, increased significantly. Vodacom therefore implemented a supplementary disconnection rule in September 2007 to disconnect inactive prepaid SIM cards after 13 months of being kept in an active state, by call forwarding to voic only, and not having has any other revenue generating activity on Vodacom s network. The implementation of the supplementary disconnection rule led to the disconnection of an additional 2.9 million prepaid SIM cards in September 2007, increasing churn on the prepaid customer base to 47.9% in the 2008 financial year and resulted in higher prepaid ARPU than would have otherwise occurred. For other African countries, each subsidiary has its own disconnection rule to disconnect inactive prepaid customers. Vodacom Lesotho disconnects its prepaid customers at the expiration of time window lock of 210 days. Vodacom Tanzania, Vodacom DRC and Vodacom Mozambique disconnect their prepaid customers if they record no revenue generating activity within a period of 215 consecutive days. (3) Gross connections have been restated in the 2006 financial year due to a change in Vodacom s reporting policy. Conversions between categories have now been excluded from gross connections. Based on the previous policy, contract connections would have been 702 thousand in the 2006 financial year and prepaid connections would have been 8,422 thousand in the 2006 financial year. (4) Vodacom s churn is calculated by dividing the average monthly number of disconnections during the year by the average monthly total reported customer base during the year. Vodacom s South African market share is derived from Vodacom s total customers, and the total estimated mobile customers of MTN, Cell C and Virgin Mobile. (5) Vodacom s traffic comprises total traffic registered on Vodacom s network, including bundled minutes, outgoing international roaming calls and calls to free services, but excluding national and incoming international roaming calls. Vodacom has changed the calculation of traffic in the 2006 financial year to exclude packet switch data traffic. (6) Vodacom s average monthly revenue per customer, or ARPU, is calculated by dividing the average monthly revenue during the year by the average monthly total reported customer base during the year. ARPU excludes revenue from equipment sales, other sales and services and revenue from national and international users roaming on Vodacom s networks. (7) Vodacom s average monthly minutes of use per customer, or average MOU, is calculated by dividing the average monthly minutes during the period by the average monthly total reported customer base during the year. MOU excludes calls to free services, bundled minutes and data minutes. (8) Vodacom had a total of 732, 581 and 469 temporary and contract employees as of March 31, 2008, 2007 and 2006, respectively. Headcount excludes outsourced employees. Employees seconded to other African countries are included in the number of employees of other African countries and excluded from Vodacom South Africa s number of employees. (9) Includes 100% of Vodacom s operations in the Democratic Republic of the Congo.

23 Vodacom s acquisitions and dispositions Service provider acquisitions On August 31, 2007, Vodacom purchased an additional 30% shareholding in Smartphone SP (Proprietary) Limited for R935 million, with goodwill amounting to R931.2 million. This increased its shareholding in Smartphone from 70 to 100%. On September 1, 2007, Vodacom increased its interest in the equity of Smartcom (Proprietary) Limited to 100% by acquiring an additional 12% for R18 million, with goodwill amounting to R18.0 million. Subsequent to the above acquisitions, the operations of Smartphone, Smartcom and Cointel V.A.S. (Proprietary) Limited were integrated into the operations of Vodacom Service Provider Company (Proprietary) Limited. Vodacom Ventures (Proprietary) Limited Vodacom Ventures (Proprietary) Limited was formed with the purpose of generating innovative telecommunications products and services for Vodacom by investing in companies. In September 2007, Vodacom Ventures acquired an additional 16% equity stake in G-Mobile Holdings Limited, a Wi-Fi corporation, by exercising its call option. This resulted in Vodacom Ventures holding 26% of the aggregate issued share capital of G-Mobile Holdings Limited. During November 2007, Vodacom Ventures acquired a 35% stake in Xlink Communications (Proprietary) Limited, a value added service provider of wireless data transfer systems and services using GPRS, EDGE, 3G and HSDPA. Dispositions On September 3, 2007 Vodacom disposed of its 100% interest in Stand 13 Eastwood Road Dunkeld (Proprietary) Limited for R16 million. Vodacom s black economic empowerment equity deal Vodacom is in the process of finalising a R7.5 billion BEE equity deal for an interest of less than 10% in Vodacom South Africa, whereby 30% of the BEE shares are expected to be made available to black South Africans and Vodacom s black business partners in a public share offer that will specifically be targeted at low income groups. Vodacom staff are expected to take a further 25%, and the remaining 45% is expected to be taken up by two BEE strategic partners. Vodacom announced that it had selected Thebe Investment Corporation (Pty) Ltd and Royal Bafokeng Holdings (Pty) Ltd as preferred parties and signed transaction agreements with these two parties on June 26, In June 2008, Tiger Consortium, one of the losing bidders, filed a court interdict against Vodacom. On June 6, 2008 the application was dismissed by the South Africa High Court without decision on the merits and ordered costs payable for Vodacom s counsel. If the Tiger Consortium wishes to proceed with this matter further, it would be required to pay these costs and provide security for future costs. While Telkom has announced that it supports a BEE deal, the final terms are in the process of being approved by Vodafone and Telkom. Vodacom is expected to announce the details of its broad based BEE transaction in the third quarter of Changes in Vodacom s South African prepaid customer base Vodacom s South African operations define active customers as customers with a SIM card that have revenue generating activity in the three months leading up to the reporting date. Up to June 15, 2006, calls forwarded to voic were regarded as revenue generating activity and such SIM cards were classified as active customers. An analysis of the customer base, based on statistical sampling, has revealed that a large number of SIM cards have calls forwarded to voic as their only revenue generating activity and a majority of such messages are never retrieved by the customer, resulting in estimated ARPUs of less than R1 per month. As a result, Vodacom changed its definition of active customers to exclude calls forwarded to voic from the definition of revenue activity effective June 15, Vodacom deleted approximately 3 million customers during the period of this rule change. As a result of the rule change, prepaid churn and ARPU increased during the 2007 financial year. Vodacom subsequently changed its definition of revenue generating activity back to include calls forwarded to voic effective September 1, Such SIM cards were disconnected from the network after being inactive for 215 consecutive days. Since implementing this change, prepaid SIM cards remaining in an active state on the network, with only call forwarding to voic and no other revenue generating activities, increased significantly. Vodacom therefore implemented a supplementary disconnection rule in September 2007 to disconnect inactive prepaid SIM cards after 13 months of being kept in an active state by call forwarding to voic only, and not having had any other revenue generating activity on Vodacom s network. Implementing the supplementary disconnection rule led to the disconnection of an additional 2.9 million prepaid SIM cards in September 2007, increasing churn on the prepaid customer base to 47.9% in the 2008 financial year and resulting in a higher prepaid ARPU than would otherwise have occurred. Vodacom Business During the 2007 financial year Vodacom created Vodacom Converged Solutions, which was intended to become a significant supplier of converged information, communications and technology services across the entire market, including the bundling of products across previously separate markets into a single converged solution for customers. It further involved the expansion of the existing network to provide both fibre and wireless solutions as may be required. During the 2008 financial year, Vodacom restructured Vodacom Converged Solutions and renamed it Vodacom Business. Telkom Annual Report

24 Operational review continued 130 Vodacom Business was established to provide converged solutions and services to corporate customers. The strategic aim of the division is to play a role in the broadband access services space, capitalise on transmission and self-provisioning opportunities, grow revenue through managed services opportunities and enhance the retention of corporate clients. The intention is to gain market traction and an increased customer base while developing a Next Generation Network. Vodacom Business developed a service portfolio that includes Next Generation Internet Protocol voice services, managed networks and infrastructure services, access services, hosting and applications. The platforms, systems and organisation have been created and the initial commercial products are being marketed, with the balance of the service portfolio expected to become available during the course of the 2008 calendar year. Vodacom s agreement with MultiChoice On May 8, 2007 Vodacom formalised its entry into the broadcasting and multimedia market by announcing that it had secured an exclusive pay-tv agency agreement with MultiChoice. With DStv Select, Vodacom and non-vodacom customers have a choice between two DStv Select bouquets, each offering a variety of the latest entertainment, news, sport, movies, documentaries and music channels. Vodacom has approximately 31,000 Unique Mobile TV users as at March 31, 2008, compared to approximately 33,000 Unique Mobile TV users as at March 31, Vodacom s operations in South Africa Market overview Vodacom had approximately 24.8 million customers in South Africa as at March 31, As at March 31, 2008, Vodacom s 7,300 base stations are capable of reaching approximately 98% of the country s population based on the last official census conducted in 2001, and covers approximately 72% of the total land surface of the country. The estimated penetration rate for mobile communications in South Africa has increased to approximately 94% as at March 31, Products and services Vodacom offers a wide range of mobile voice and data communications products and services, including value-added services. Vodacom s services also include the sale of handsets. Vodacom has a history of innovation as illustrated by its record of product offerings. It was the first mobile communications network operator globally to offer prepaid mobile commu - nications services on an intelligent network platform and to offer its customers coverage across the whole of Africa where commercial GSM roaming is available. Significant products launched include data, voice and SMS bundles for prepaid, Top Up and contract customers. Vodacom continued to launch and support Vodafone products such as Vodafone Simply, welcome tones, extended Mobile TV to 26 channels and Vodafone live! release seven with its simple, tabular, user friendly approach. A number of corporate and business products were also launched, ranging from and enhanced voic to corporate access points which enhance the security of mobile customers using a 3G/HSDPA data card remotely, and in May 2008 Vodacom launched High Speed Uplink Packet Access (HSUPA), an enhancement of its existing HSDPA service. As discussed previously, Vodacom Converged Solutions, subsequently renamed Vodacom Business, was formed in the 2007 financial year to provide converged solutions and services to corporate customers. Additionally, our pay-tv agreement with MultiChoice further extends our product offerings in South Africa. In order to achieve company growth, Vodacom diversified horizontally into the Internet service provider and information technology services industries in the 2008 financial year. Vodacom will seek to continue to grow data revenues by launching useful office tools and software applications such as 3G, HSDPA, HSUPA, Mobile TV, Vodafone Mobile Connect Cards and BlackBerry at competitive prices. BlackBerry Connect, as well as BlackBerry Built-In, which enable customers to access BlackBerry services without a traditional BlackBerry device, have become available on high-range handsets produced by manufacturers including HTC, Nokia and Sony Ericsson. In future, Vodacom intends to continue to focus on offering premier interactive voice response, premium short messaging services, general packet radio services, multimedia services, HSDPA services, HSUPA services, Internet services, e- mail services and fixed-to-mobile products. Prepaid services As at March 31, 2008, approximately 85.3% of Vodacom s South African customers were prepaid customers. Vodacom has two prepaid products, Vodago and 4U. Vodago was Vodacom s initial prepaid product and offers two tariff plans, Vodago Standard and Vodago Smartstep. Vodacom s 4U is a prepaid per second billing product targeted at the youth market who have higher usage of SMS and a need for per second billing. Since its inception, the number of 4U customers has increased significantly and as at March 31, 2008, approximately 92.7% of Vodacom s prepaid customers are 4U customers. Vodago and 4U provide instant access to the Vodacom network and enable low volume customers to control mobile telephone costs based on usage as there are no long term contracts. Fax and certain data services became available to Vodago customers in the 2006 financial year. A wide variety of retail outlets sell recharge vouchers for Vodacom s prepaid customers. Recharging can also take place electronically and through the use of banking networks. Because prepaid customers pay in advance for their mobile service, the risk of bad debts is eliminated and the risk of fraud is substantially reduced. In addition, prepaid services provide cost savings to Vodacom as bills do not need to be sent to prepaid customers and handsets for prepaid customers are not

25 subsidised. There are less service offerings for the prepaid mobile communications market than there are for the contractbased market. Following the launch of 4U and Vodago Smartstep, Vodacom is continuing to implement initiatives to expand its prepaid mobile communications service offerings and to gain a greater understanding of its prepaid customer base and its requirements. Contract subscription services As at March 31, 2008, approximately 14.3% of Vodacom s South African customers are contract customers compared to 13.1% as at March 31, This increase is due to contracts becoming more affordable and tailored to different market segments. Vodacom offers two broad categories of contract subscription packages: Consumer packages such as Weekend Everyday, and business packages such as Business Call. Additional packages such as Shared Talk 1500 were launched in the 2007 financial year to address the requirements of the small and medium sized enterprises (SME) market. Vodacom launched the Family Top Up package in the 2004 financial year, a hybrid contract product which combines the benefits of a contract service with the financial control offered by a prepaid service, and is designed to facilitate migrations to contract packages from existing prepaid packages. Vodacom s Family Top Up package has proven highly successful and continues to contribute to the revenue growth in contract customers, although the introduction of lower-end packages resulted in Top Up packages representing a smaller percentage of total contract packages. As at March 31, 2008, 26.4% of Vodacom s contract customers were Top Up customers compared to 30.0% as at March 31, 2007 and 27.6% at March 31, Community services Vodacom has developed a number of community service telephone units that are installed throughout communities either on an individual basis or grouped in a container with the Vodacom brand. Community service phones are purchased by local entrepreneurs who resell community phone services. Community service phones are preloaded with airtime and can be recharged electronically by telephone shop operators when the airtime on the phone expires. The demand for community service units has been strong since introduction. Vodacom had deployed approximately 103,024 community service phones as at March 31, 2008, exceeding its initial aggregate licence target of 22,000 community service phones. The development of community service phones has made it possible to provide mobile access to the more than 20 million South Africans who live in rural communities where there is less than one telephone line per hundred people, and have improved the quality of life for many South Africans who previously had no access to telecommunications services. Community service phones have also been a cost-effective method of significantly increasing traffic revenue on Vodacom s network due to their low roll-out costs to Vodacom and low barriers to entry for customers. Community service phone ARPUs decreased by 23.6% to R689 per month in the 2008 financial year from R902 per month in the 2007 financial year due to increased competition from Cell C and other products that have tariff structures competitive to community service plans. Value-added mobile voice and data services Vodacom offers an extensive range of value-added mobile voice and data services including caller identification, call forwarding, call waiting, voic , entertainment, mobile information and commerce services, short messaging services, mobile multimedia services, data services, mobile Internet access, fax services, e- Billing, video mail, missed call keeper and twin call services, the latter of which enable customers to use two mobile phones under the same number. Through Vodacom s ten percent investment in Wireless Business Solutions, also known as iburst, a competitor to Telkom in the wireless area, Vodacom now supplies customers with continued high speed connectivity through broadband Internet and services. Wireless Business Solutions has a licence that enables it to build a WiMAX network that complements Vodacom s HSDPA wireless broadband service. Vodacom s Call Sponsor offering enables contract customers to sponsor the calls of up to three prepaid customers. In the 2005 financial year, Vodacom entered into an alliance with Vodafone, pursuant to which Vodacom is able to market Vodafone branded products and services. Vodacom has experienced substantial growth in the use of its value-added voice and data services, resulting in increased traffic revenue on its network. Data revenue contributed 10.4% to Vodacom s total revenue in the year ended March 31, 2008, up from 8.1% in the year ended March 31, 2007 and 6.0% in the year ended March 31, Vodacom s data revenue increased primarily due to higher penetration levels influenced by more affordable product offerings. In South Africa, Vodacom transmitted 4.7 billion SMSs over its network in the 2008 financial year, compared to 4.5 billion SMSs in the 2007 financial year. There was an increase in users of GPRS in the 2008 financial year, with the number of GPRS users increasing to approximately 4.7 million as at March 31, 2008 from approximately 2.8 million as at March 31, 2007 and approximately 1.4 million as at March 31, The number of active data users includes approximately 1.4 million MMS users, approximately 370,000 data card and USB modem users, approximately 1.3 million 3G/HSDPA handsets, approximately 1.4 million Vodafone live! users and approximately 31,000 Unique Mobile TV users as at March 31, 2008, compared to approximately 1.2 million MMS users, approximately 149,000 data card and USB modem users, approximately 584,000 3G/HSDPA handsets, approximately 899,000 Vodafone live! users and approximately 33,000 Unique Mobile TV users as at March 31, As at March 31, Telkom Annual Report

26 Operational review continued , Vodacom had 32,273 Blackberry users registered on its network, compared to approximately 23,328 as at March 31, Vodacom expects that the broad introduction of always-on connectivity, faster response and generally higher speed packetswitched data services such as GPRS and universal mobile telecommunications system (UMTS), will provide the platform for future value-added services. Handset sales Vodacom Service Provider Company (Pty) Limited (Vodacom Service Provider) sells handsets to its distribution channel and other service providers. Service providers in South Africa generally subsidise handsets when a contract customer enters into a new contract or renews an existing contract, depending on the airtime and tariff plan and type of handset purchased. Handset sales amounted to approximately 5.1 million units, 4.6 million units and 3.8 million units in the 2008, 2007 and 2006 financial years respectively, representing increases of approximately 10.9%, 21.1% and 58.3% in the 2008, 2007 and 2006 financial years respectively. Interconnection services Vodacom has interconnection agreements with national mobile operators MTN and Cell C, as well as with Telkom, Neotel and carrier-of-carriers licensee, Sentech. In addition, Vodacom has an interconnection agreement in place with eight VANS operators. Roaming services Vodacom has national roaming agreements in place with national mobile network operator Cell C, which is terminable fifteen years after commencement on or after November 14, 2016, as well as with USALs Amatole, itel, BTel, Karabotel and Kingdom Communications, which are terminable three years after commencement. These agreements unilaterally enable the customers of Cell C and the USALs to make use of Vodacom s network to originate and terminate calls as well as to access other telecommunications services. In addition to allowing the USALs customers to roam on Vodacom s network, Vodacom provides the USALs with certain ancillary services such as SIM card provisioning, recharge facilities and customer care. To enable Vodacom to provide its customers with telecommunications services while outside South Africa, and to provide services to customers of foreign network operators while outside South Africa, Vodacom has international roaming agreements with 397 foreign mobile network operators in 182 countries as at March 31, Of these, 149 allow for GPRS roaming, 54 allow for 3G roaming, three allow for HSDPA roaming and 27 allow for prepaid roaming. Objectives for the 2009 financial year will continue to focus on increasing the footprint for Vodafone Passport, prepaid and GPRS networks as well as maintaining reductions in the inter-operator tariffs charged to Vodacom by other networks. Customers Vodacom has experienced substantial growth in its mobile customer base since its inception in As at March 31, 2008, there are an estimated 45 million mobile customers in South Africa, which represents an estimated penetration rate of 94% of the population. As at March 31, 2008, Vodacom estimated that its customers represent approximately 55% of South African mobile customers, making Vodacom the leading mobile communications network provider in South Africa based on total estimated customers. The South African customer base has continued to grow in the 2008 and 2007 financial years with the majority of the growth resulting from the prepaid market, partially offset by an increase in prepaid churn due to the implementation of the supplementary disconnection rule. The strong growth in contract customers was a direct result of the large number of gross connections achieved with continued levels of handset support to service providers with respect to the contract base, coupled with decreased churn in the contract base. Loyalty and retention programmes continue to play an integral role in achieving the strategy of retaining market share and attracting new customers. Prepaid gross connections increased 11.1% to approximately 11.2 million in the 2008 financial year compared to approximately 10.1 million in the 2007 financial year. Contract gross connections increased 17.4% to approximately 782,000 in the 2008 financial year compared to approximately 666,000 in the 2007 financial year. Growth in contract customers was largely due to the increase in connections, Family Top Up, 3G data card packages, Messenger data packages and Weekend Everyday consumer packages. As at March 31, 2008, 26.4% of Vodacom s contract customers are Top Up customers, compared to 30.0% as at March 31, 2007 and 27.6% as at March 31, Vodacom expects that the number of contract customers in South Africa will eventually level off, and that the number of prepaid customers in South Africa will continue to grow in the medium term driven by the continued demand for basic voice telephone services. Vodacom s growth in prepaid customers could be negatively impacted by restrictions contained in the Regulation of Interception of Communication and Provision of Commu - nication-related Information Act (RICA), which may require a burdensome registration process for customers and may require Vodacom to disconnect prepaid customers if it is not able to obtain such information. Vodacom believes that mobile communications services provide a cost-effective means of telephone services for customers in underserviced and rural, outlying areas. Vodacom s efforts will therefore continue to focus on growing customer numbers while carefully managing its existing customer base, marginal revenue per customer and customer-related acquisition and retention costs. Vodacom, MTN and Cell C each provide connection commissions to service providers and dealers or agents. These are often utilised by agents to subsidise handsets as an incentive

27 for customers to switch operators to obtain a new handset and to reduce the cost of access. As a result, Vodacom is seeking to lower its contract churn rate and retain high value customers through focused handset upgrade policies, loyalty programmes and other retention measures, while continuously monitoring customer acquisition and retention costs. Vodacom also actively manages churn through customer relationship management systems, developing its own distribution and logistics capabilities and other retention initiatives. Prepaid customer churn is negatively affected by the high rate of unemployment in South Africa and the low cost of access. Traffic The following table presents information related to the traffic volume of Vodacom s customers in South Africa for the periods indicated. Traffic comprises outgoing calls made in South Africa and abroad and incoming calls received by Vodacom s customers in South Africa, excluding national roaming and incoming international roaming calls. Year ended March 31, 2007/ /2007 (millions of minutes, except percentages) % change % change Outgoing 11,354 13,638 15, Incoming (interconnection) 5,712 6,745 7, Total traffic 17,066 20,383 22, Growth in traffic in the 2008 financial year was primarily due to the 7.9% growth in the total customer base in South Africa from 23.0 million customers as at March 31, 2007 to 24.8 million customers as at March 31, Customer calling patterns continued the trend of the past few years, with total mobile-tomobile traffic increasing by 13.5%, while total mobile-to-fixed and fixed-to-mobile traffic only increased by 3.5% in the 2008 financial year. Growth in traffic in the 2007 financial year was mainly due to the 20.1% growth in the total customer base in South Africa from 19.2 million customers as at March 31, 2006 to 23.0 million customers as at March 31, 2007, with total mobile-to-mobile traffic increasing by 23.9% and total mobileto-fixed and fixed-to-mobile traffic increasing by 2.9% in the 2007 financial year. Tariffs Vodacom s tariffs are subject to regulatory scrutiny and, in certain circumstances, approval by ICASA. The contract tariff packages are designed to appeal to consumers and business customers. Vodacom sets its contract subscription package tariffs utilising a balanced mix of access and usage. For those tariff packages where voice usage is high, the per-minute rate is lowered and the monthly subscription tariff is raised. For those packages where the voice usage is low, the per-minute tariff rate is increased and the monthly subscription tariff is lowered. For those users for whom the monthly subscription tariff is a barrier to entry, Vodacom offers prepaid packages with no monthly subscription tariff, but sets the per minute voice tariff rate higher. Vodacom and MTN are parties to an amended interconnection agreement with each other, and new interconnection agreements with Cell C. Effective January 2005, the mobile-to-mobile interconnection rates for both commercial and community service telephone originated calls were increased from R1.23 peak and R0.73 off-peak to R1.25 peak and R0.77 off-peak for commercial calls and from R0.04 peak and R0.04 off-peak to R0.06 peak and R0.06 off-peak for community service calls, in each case exclusive of VAT. Customer care Vodacom services customer needs through a variety of channels such as call centres, walk-in centres established in Bloemfontein, Cape Town, Durban, Johannesburg, Midrand and Port Elizabeth, interactive voice response, and Vodacom s web sites. Vodacom s key focus for the 2008 financial year has been on call handling with the primary focus being the distribution of customer calls to appropriately skilled agents, accompanied by a redesign of the customer care interactive voice response. Vodacom s key focus areas for the 2007 financial year was to grow capacity in its call centres and concentrate on customer retention following the implementation of mobile number portability. Approximately 70% of customer queries in the 2008 financial year were handled by the interactive voice response system and more than 80% of customer queries were resolved with the first call. Vodacom has become increasingly proactive in developing relationships with its customers, particularly in the high revenue segment of the market. Seven centres are currently active, and one more is planned in the Gauteng Province. As data services became more popular, all of these centres were upgraded to assist customers with queries of a technical nature and in the case of the Vodaworld centre, a dedicated data centre was created where customers receive personalised attention to resolve their highly technical data-related queries. A new strategic call handling approach was developed to consolidate skills and move customer care from a multi-skilled environment to a specialised single-skilled environment. This project was closely aligned with the redesign of the existing Telkom Annual Report

28 Operational review continued customer care interactive voice response unit. Customers from across the country from four language groups were interviewed to design an effective customer interface. Changes included new interactive voice response menu structures, the re-scripting of interactive voice response prompts, and more effective call routing designed to provide an improved overall customer experience. Call volume to agents has subsequently decreased due to fewer repeat calls. Infrastructure and technology Vodacom operates one of the largest mobile communications networks based on total estimated customers on the African continent, using and deploying digital GSM technology within the GSM 900/1800/2100 MHz frequency band. In South Africa, the network s core infrastructure is characterised by mobile switching centres (including visitor location registers and gateways), while the radio network consists of radio network controllers, Node Bs (UMTS base transceiver stations), base station controllers and base transceiver stations. At this point Vodacom has deployed GPRS in all areas of its GSM network, whereas EDGE is deployed to a lesser degree and UMTS is in turn deployed to an even lesser degree, largely in major metropolitan areas, key towns and resorts only. As at March 31, Macro base transceiver stations 4,873 5,231 5,603 Micro base transceiver stations 1,528 1,634 1,697 Total 6,401 6,865 7, The Vodacom network s UMTS 3G infrastructure as at March 31, 2008 consists of 29 radio network controllers, 2,559 UMTS base transceiver stations (Node B), 13,731 UMTS transceivers and HSDPA functionality across the 3G network. During the 2008 year, Vodacom commenced with deploying a WiMAX network on behalf of Wireless Business Solutions. Phase 1 of this network was deployed in Johannesburg, Pretoria, Cape Town and Durban. As at March 31, 2008, 60 WiMAX base stations were ready for network switch-on. Vodacom is planning user trials in the second quarter of the 2009 financial year. Vodacom embarked on the self-provisioning of transmission capability towards the end of the 2007 calendar year. A total of 145 microwave links have been installed and are operational. Vodacom is currently deploying core fibre rings in Gauteng, the northern borders of Gauteng, Kwa-Zulu Natal, the Western Cape, the Eastern Cape and the Central region for the selfprovisioning of a regional transmission core network. This network enables Vodacom to provide value-added voice and data services supported by voic platforms, short messaging service centres, a wireless application protocol platform, a mobile Internet gateway platform supporting advanced SIM toolkit applications and an intelligent network platform. As at March 31, 2008, approximately 36% of Vodacom s base stations are 3G enabled and Vodacom has installed dual band (GSM900/GSM1800 MHz) base transceiver stations in 2,532 locations, including 19,081 GSM1800 MHz transceivers. In the design of its network, Vodacom has paid careful attention to the needs of customers and to the environment by making an extensive effort to implement sites in the most discrete manner possible. Furthermore, attention has been given to management of electromagnetic emissions to ensure compliance with recognised international environmental standards such as those developed by the International Commission on Non Ionizing Radiation Protection. Competition The current South African mobile telecommunications market consists of three mobile communications network operators: Vodacom, MTN (a wholly owned subsidiary of MTN Group Limited, a public company listed on the JSE) and Cell C, which announced in June 2006 that it entered into a joint venture with Virgin Mobile. As at March 31, 2008, Vodacom is the market leader with an estimated 55% market share based on the total estimated customers in the South African mobile communications market, while MTN has an estimated 34% market share, Cell C an estimated 11% market share and Virgin Mobile, through its joint venture with Cell C, holding less than 1% of the estimated market share. Vodacom competes primarily on the basis of product quality, availability and network coverage. Vodacom believes that increased competition could have an adverse impact on its tariffs and churn rate. Vodacom s operations in other African countries Vodacom intends to increase revenue from its other African operations by continuing to grow its existing operations in sub- Saharan Africa through converged infrastructure and services and, to the extent available, by selectively acquiring additional telecommunications licences or operators in other African markets in future. Investments outside South Africa are evaluated and monitored against key investment criteria, focusing primarily

29 on countries with stable economic and political conditions or good prospects for growth, market leadership and profitability. Other key factors include Vodacom s ability to gain majority ownership, develop strong local partnerships and obtain nonrecourse financing, where available. Where Vodacom is not able to obtain non-recourse financing, it seeks to fund operations from internally-generated funds. Other African operators are branded under the Vodacom name. Vodacom is also considering entering new markets by seeking out alternative entry strategies such as through management and technical service agreements and acquiring non-traditional GSM operators such as Internet service providers and other telecommunications service providers. Vodacom has investments in mobile communications network operators in Lesotho, Tanzania, the Democratic Republic of the Congo and Mozambique. The number of customers served by Vodacom s operations outside South Africa has grown significantly to approximately 9.2 million as at March 31, 2008, from approximately 7.1 million as at March 31, 2007 and approximately 4.4 million as at March 31, Revenue from Vodacom s operations outside South Africa has grown to R5,394 million in the year ended March 31, 2008, up from R4,139 million in the year ended March 31, 2007 and R2,974 million in the year ended March 31, Our share of Vodacom s operating profit from other African operations was R395 million in the year ended March 31, 2008, compared to R261 million in the year ended March 31, 2007 and R144 million in the year ended March 31, Lesotho Vodacom owns an 88.3% interest in Vodacom Lesotho (Pty) Ltd. Although Vodacom Lesotho is a very small operation by South African standards, Vodacom launched its Lesotho operations due to the strategic geographical importance of Lesotho in terms of Vodacom s market share in neighbouring South Africa. Products Vodacom Lesotho offers a variety of prepaid and contract products to customers. Vodacom Lesotho s prepaid plans are consistently the most popular packages and accounts for 97.0% of Vodacom Lesotho s total customer base as at March 31, 2008, compared to 97.5% as at March 31, 2007 and 97.1% as at March 31, The current prepaid offering is known as Mocha-o-chele. The recently launched Super Talk Dual 500 and 1000 packages offer free bundled minutes and SMSs in Lesotho, South Africa and other selected countries worldwide. Additional contract packages include Corporate Executive, Master Plan, Budget Plan and Family Plan, which provide connectivity options without bundled services or subsidised handsets, except for the Corporate Executive plan, which offers free or subsidised handsets. Vodacom Lesotho also offers public phone services and a direct-connect service allowing customers to access the Vodacom Lesotho network directly from their PABX. Vodacom Lesotho also offers community services and has recently introduced an ultra low cost product, Motsamai Payphone, to promote entrepreneurship and increase public phone distribution. Infrastructure The Vodacom Lesotho network has 77 base transceiver stations, one mobile service switching centre, three base station controllers, one short message service centre, one intelligent network platform and one voic platform. WiMAX base stations have been installed in various towns in the lowlands of Lesotho to facilitate fixed-data connections for enterprise clients. Vodacom Lesotho s capital expenditures were R39 million, R25 million and R26 million in the 2008, 2007 and 2006 financial years respectively. The continued investment is an indication of the company s drive to expand and optimise the existing infrastructure in order to provide the widest coverage and superior network quality and service levels to its customer base. Regulatory environment The regulatory environment in Lesotho continues to prove challenging. The regulatory authorities in Lesotho issued a Communications Sector Liberalisation Framework in January In terms of this framework, there is to be no limit on the number of participants in any service. All existing network operators will be allowed to operate international gateways and voice and data services are to be fully liberalised. Further proposals in the framework that will allow specified classes of Internet service providers to have gateway licences were not implemented during the 2008 financial year. Employees The headcount for Vodacom Lesotho increased to 97 employees as at March 31, 2008, compared to 63 employees as at March 31, 2007 and 67 employees as at March 31, The increase resulted from the company s continued expansion. The number of customers per employee, including temporary employees, decreased from 4,429 customers per employee as at March 31, 2007 to 4,072 customers per employee as at March 31, 2008 due to an increase in the number of temporary employees. Tanzania Vodacom owns a 65% interest in Vodacom Tanzania Limited. The Vodacom Tanzania market profile was 99.4% prepaid as at March 31, 2008, compared to 99.3% prepaid as at March 31, 2007 and 99.5% prepaid as at March 31, This profile is not expected to change significantly in the near future. Vodacom Tanzania had a churn rate of 45.5% in the 2008 financial year, 35.6% in the 2007 financial year and 28.5% in the 2006 financial year due to the high and increasing levels of competition in Tanzania. Vodacom Tanzania s estimated market share was approximately 52% as at March 31, Products Vodacom Tanzania s current package offerings are Vodago, its prepaid product, Vodachoice, its contract product, and Telkom Annual Report

30 Operational review continued 136 Vodajazza, a hybrid service that provides cost control to postpaid customers. During the course of the 2006 financial year, Vodacom Tanzania introduced Vodafasta, a recharge product which allows prepaid customers to electronically recharge airtime via registered vendors. This product enhances the availability of Vodago prepaid airtime and reduces the cost of physical distribution. Vodachoice continues to be the preferred contract package although Vodajazza, offered on the prepaid billing platform, has gained popularity in the corporate market, and was re-launched during the 2008 financial year into bundled packages. Infrastructure Vodacom Tanzania became the largest mobile communications network operator in Tanzania within one year of launching. Vodacom Tanzania s capital expenditures were R713 million, R958 million and R322 million in the 2008, 2007 and 2006 financial years respectively. Network coverage is at approximately 40% of the land surface of Tanzania and approximately 63% of the population as at March 31, 2008, compared to approximately 20% of the land surface and approximately 54% of the population as at March 31, In 2007, Vodacom Tanzania commercially launched its mobile Internet offering over its 3G/HSDPA and 2.5G GPRS and EDGE networks, which together with its leased line offering utilising WiMAX, have enhanced data revenues. The 3G/HSDPA data product covers Dar es Salaam, Dhoma and Arusha while the GPRS and EDGE networks have national coverage. Core data revenues continued to be primarily from SMS in the 2008 financial year, supported by Vodaflava, previously Vodatariffa, a premium rated SMS based information, ring tone and logo download service. Regulatory environment New telecommunications regulations were introduced, effective February 23, Vodacom Tanzania is currently regulated by the Tanzanian Communications Regulatory Authority (TCRA) under the Tanzania Communications Act, 1993, as well as the Tanzania Regulatory Authority Act, 2003 and it is under these communications acts that the new telecommunications regulations were adopted, and the TCRA introduced a converged licensing framework otherwise referred to as the unified licensing framework, which is service and technology neutral. The new regulations ended the fixed-line monopoly of TTCL, and lead to the liberalisation of the telecommunications market within the country. The negotiation of the terms and conditions of migration of Vodacom Tanzania s existing licence to the new regulatory framework was finalised during the 2007 year. Vodacom Tanzania was granted new licences on July 26, 2006 in terms of the migration to a new regulatory framework. These licences were for national and international network facilities, network services application services and radio frequency spectrum resource usage. Employees Vodacom Tanzania had a total headcount of 766 employees as at March 31, 2008, compared to 527 employees as at March 31, 2007 and 438 as at March 31, Included in employees as at March 31, 2008, 2007 and 2006 are 15, 9 and 10 secondees respectively, who are seconded from Vodacom International Limited. The Democratic Republic of the Congo Vodacom owns a 51% interest in Vodacom Congo. Improved affordability during the 2006 financial year, and the increase in spending power as a result of a positive economic outlook during 2007 and 2008, fuelled expansion of Vodacom Congo s customer base as the penetration rate of mobile customers in Congo increased from 6% as at March 31, 2006 to 9% as at March 31, 2007 and 12% as at March 31, ARPU was affected negatively as lower-end users constituted a large part of the growth and the inactive customer base increased. The main contributing factors in achieving customer and profit growth during the 2008 financial year include coverage roll-out in strategic areas, capacity upgrades, the launching of new products and services and an effective and aggressive sales and distribution strategy. Vodacom Congo s customer base consisted of 97.6%, 98.3% and 97.9% prepaid customers as at March 31, 2008, 2007 and 2006 respectively. Vodacom competes on the basis of effective distribution channels, network coverage, network quality, launch of new products and services and a strong and respected brand. Vodacom Congo continued to be the market leader in the Democratic Republic of the Congo with an estimated market share of approximately 41% as at March 31, 2008, compared to approximately 47% as at March 31, 2007 and approximately 48% as at March 31, 2006, based on the total estimated mobile market. Products Vodacom Congo currently offers contract, prepaid, PABX, Internet service provider and public phone services. The contract product is aimed at the corporate market with a focus on valueadded services and customer service. New business solutions such as ATM recharge and GPRS terminals have been launched for banks and other corporate customers, to perform real time transactions to enable their businesses in the DRC. The prepaid and public phone products are aimed at the broad Congolese market with the main competitive advantage being coverage, network quality and distribution. To further enhance data revenue streams, Vodacom Congo commercially launched GPRS in February The application was introduced to support data transfer requirements during the electoral process and meet the data demands of local businesses and corporate clients. Vodacom Congo offers additional products and services such as data and voice bundled packages to new and existing customers.

31 Infrastructure Vodacom believes that its current coverage and market share levels provide Vodacom Congo with a strong position to benefit from an economic upturn. Network coverage has been rolled out in all of the nine provinces of the Democratic Republic of the Congo, including 274 towns and consisting of 425 base stations and six mobile service switching centres as at March 31, 2008, compared to 238 towns, 368 base stations and four mobile service switching centres as at March 31, 2007 and 184 towns, 373 base stations and four mobile service switching centres as at March 31, Network capacity in the main centres has also been upgraded to maintain quality and service. Vodacom Congo covers approximately 11% of the geographical area of the Democratic Republic of the Congo and approximately 53% of the population as at March 31, 2008, compared to approximately 10% of the geographical area and approximately 53% of the population as at March 31, 2007 and approximately 8% of the geographical area and 44% of the population as at March 31, Regulatory environment In the 2008 financial year, a Bill was initiated by the Minister of Finance that will subject mobile operators to excise duties of 10% with a total burden of taxes on services revenue amounting to 28%. This Bill was passed on May 8, 2008 and is awaiting promulgation by the Head of State. The telecommunications industry in the Democratic Republic of the Congo is subject to a recently promulgated ministerial decree requiring the registration of the entire customer base of all network operators. This decree required prescribed particulars of all customers to be obtained and maintained by June 30, The sanction for non-compliance by any operator who has not identified its customers in accordance with the requirements of this decree within three months from March 28, 2008 could result in: A fine equivalent to between USD5,000 and USD10,000 per customer; Suspension of the licence for a period not exceeding three months in the event of repetition; and Suspension of the licence in the event of a likely disturbance of law and order/safety. Vodacom is making every effort to obtain the required information but management believes it is unlikely that Vodacom will meet all the requirements as prescribed in this decree by June 30, Management is engaging with the relevant ministries on this matter and is presently unable to reliably assess the potential impact on Vodacom in the event of non-compliance with this decree. Employees Vodacom Congo had 919, 745 and 479 employees as at March 31, 2008, 2007 and 2006 respectively. The process of evaluation, identifying and training local staff is a continuous focus of the company as part of its skills transfer process. The DRC s employment market is currently very competitive with the arrival of multinational companies. Vodacom Congo staff are an attractive target for recruitment as a result of their highly valued skills and training. Vodacom Congo embarked on an intensive programme of training staff and projects such as implementing the Vodacom Congo employees cooperative and wellness programme. In previous years, a bursary scheme was implemented, aimed at targeting and developing students, and a retention scheme was implemented aimed at retaining key employees. Vodacom Congo is focused on social responsibility programmes including education, health, welfare, the environment, culture and arts. Since 2002, the company has invested about USD3.5 million in various social projects. Mozambique Vodacom owned 98% of VM (S.A.R.L.) trading as Vodacom Mozambique, and the remaining 2% was held by local consortium EMOTEL. Effective April 1, 2007, Vodacom International Limited (Mauritius) sold an 8% stake in Vodacom Mozambique to local investors, with 5% being purchased by Intelec Holdings Limitada and EMOTEL acquiring an additional 3%. On May 12, 2008, Vodacom International Limited (Mauritius) entered into an agreement to sell 5% of its 90% stake in Vodacom Mozambique to local investors, which is subject to a number of suspensive conditions. During the 2008 financial year Vodacom Mozambique increased its customer base by 29.8% to approximately 1,282,000 customers as at March 31, 2008, up from approximately 988,000 customers as at March 31, This increase is primarily a result of approximately 951,000 gross connections in the 2008 financial year, compared to approximately 797,000 in the 2007 financial year, offset in part by a churn rate of 58.7% in the 2008 financial year, compared to 41.7% in the 2007 financial year. Vodacom Mozambique had an estimated market share of approximately 40% as at March 31, 2008, compared to approximately 35% as at March 31, 2007 and 30% as at March 31, 2006, based on the total estimated mobile market. Vodacom Mozambique is focusing on coverage expansion, building sound distribution channels and delivering innovative value propositions underscored by a warm and receptive brand identity. A unique point of differentiation for Vodacom Mozambique has come from its corporate social investment projects, which sponsored the complete reconstruction of a school in Maputo, as well as the construction of an entirely new school in Maputo that opened in May 2007 and the donation of books and encyclopaedias to more than 40 schools nationally. During the year under review, Vodacom Mozambique implemented a revenue based corporate social investment fund whereby 0.02% of monthly prepaid and contract revenue is allocated to a Telkom Annual Report

32 Operational review continued 138 corporate social investment fund administered by a board of trustees who will then allocate resources to charitable causes. Products Vodacom Mozambique offers customers contract and prepaid plans and continued to roll out public phones in the 2008 financial year. Prepaid packages accounted for 97.9%, 99.0% and 98.5% of gross connections in the 2008, 2007 and 2006 financial years respectively. Contract products are primarily aimed at the corporate and business market, while prepaid products are aimed at the large informal market. Vodacom Mozambique has interactive voice response in place and customer care can handle customer queries in Portuguese and English. Since prepaid continues to constitute the bulk of business in Mozambique, a range of new innovative services was launched during the 2007 financial year to enhance the overall value proposition of the Bazza Bazza prepaid product. Launched in July 2007, Vodakool is an innovative illustration of how mobile communications can empower Mozambicans. Vodakool, the news and information portal exclusive to Vodacom, links customers with breaking local and international news, sports results, weather and financial information in partnership with local content providers. In a country where traditional media reach is generally restricted to large cities, this service helps to bridge the information divide in a society where this divide is still prevalent. Infrastructure Vodacom Mozambique s infrastructure consists of two mobile service switching centres, six base station controllers and 220 base transceiver stations as at March 31, Vodacom Mozambique increased its network to a capacity of approximately 4.0 million customers as at March 31, Vodacom Mozambique s capital expenditure was R111 million, R85 million and R121 million in the 2008, 2007 and 2006 financial years respectively. GPRS/EDGE has been available since the end of June 2006 for contract and prepaid customers. EDGE is a data service that provides a faster version of GSM wireless service. In tandem with the launch of GPRS and MMS, Vodacom Mozambique also launched VodaMail, a free service available to all contract customers. Regulatory environment In February 2007 the Mozambican Telecommunications Regulator (INCM) appointed a consultant to facilitate the introduction of cost based interconnection. As a result of the study initiated by the INCM, asymmetrical interconnection rates have been introduced in Mozambique as of January 1, 2008, which have been agreed on by all operators for a period of two years ending December 31, The asymmetrical rates were proposed by the consultant as a result of Vodacom Mozambique s late entry into the market and include an annual inflation adjustment. This two year period will allow operators to develop their own interconnect costing models, based on the long term prospective incremental costs methodology (LTPIC). If the results of such models clearly demonstrate to the remaining operators that there are substantial differences to the abovementioned tariffs for 2009, the rates may be reviewed. All operators have been informed by the INCM that all licences are to be re-issued in compliance with the new Telecommunications Law of Vodacom Mozambique was invited to submit suggestions to any amendments it wished to make to its existing licence. To date, no new licences have been issued. However, Vodacom Mozambique applied to expand its international gateway rights and to lease transmission capacity to entities other than licensed telecommunication network operators, such as Internet service providers and satellite companies, during the end of the 2006 calendar year but to date no formal response has been received from the INCM. Vodacom continues to engage TDM with regard to excessive transmission prices. Vodacom informed the INCM that it is considering the sanctions available in terms of the law in respect of the pricing that can lead to TDM being declared a dominant operator. Vodacom Mozambique believes that its ability to strictly manage costs in the face of low ARPU and low minutes of usage, while expanding coverage and distribution and intensifying promotional and product offerings, will be critical to achieving improved results. Employees Vodacom Mozambique employed 210, 187 and 170 people as at March 31, 2008, 2007 and 2006 respectively. Vodacom Mozambique continues to support the development of local skills. A succession plan and development programmes were implemented to transfer skills and knowledge to local employees. Staff issues are addressed via a consultative forum where they are given a platform to address issues. Vodacom annual report The full Vodacom annual report can be accessed at or on Vodacom s website at

33 Chief of finance s review Telkom has been working very hard to position its tremendous telecommunications assets to deal with the new, highly competitive environment and leverage opportunities for growth Deon Fredericks It is my pleasure to present Telkom s financial review for the year ended March 31, It has been a challenging year with significant changes including alignment of our strategy, increasing continued mobile substitution competition, pricing pressures and a high inflationary environment. This year focused on on transforming the business to deal more effectively with competition, delivering innovative products expanding our networks including the maintenance thereof and bedding down our growth drivers to our overall strategy. These included: Aggressive customer service improvement and we are starting to see the results especially in the corporate market and we will continue with this; Creating capacity and capability and improving the reliability of the network; and Continued bundling of services at discounted rates. Furthermore, Telkom has continued to leverage from the core strengths of the fixed-line network, continuing our migration toward a fully Internet Protocol based Next Generation Network, growing our data business, expanding geographically, realigning our product portfolio and working to achieve maximum efficiencies from our service and capital equipment suppliers. Our results to March 31, 2008 are reflective of the above focus areas and particularly of the continuing growth of lower margin data business, the early stages of development for both Multi-Links and Africa Online and continued pressure on Telkom s traditional voice revenue. Telkom s operating structure comprises three segments, fixed-line, mobile and other. The fixed-line segment provides fixed-line voice and data communications services through Telkom and the mobile segment provides mobile services through our 50% joint interest in Vodacom. The other operations segment provides directory services through the TDS Directory Operations Group, fixed mobile, data and other international communications services in Nigeria, through our newly acquired Multi-Links subsidiary, internet services outside South Africa, through our Africa Online subsidiary, and wireless data services, through our Swiftnet subsidiary, and includes Telkom Media. TDS Directory Operations and Swiftnet were previously included in our fixedline segment. Below please find a condensed summary of Telkom Group s financial results for the year ended March 31, A detailed breakdown, including segmental information, can be found in the Financial review on page 147. Telkom Annual Report

34 Chief of finance s review continued GROUP OPERATING REVENUE Group operating revenue increased by 9.0% to R56,285 million (March 31, 2007: R51,619 million) in the year ended March 31, Fixed-line operating revenue, before inter-segmental eliminations, increased by 0.7% to R32,572 million primarily due to increased data services, interconnection and subscriptions and connections revenue partially offset by a decline in traffic revenue. Mobile operating revenue, before inter-segmental eliminations, increased by 17.1% to R24,089 million primarily due to significant customer growth, offset in part by declining ARPU s as a result of increased lower spending customers connected. Our defend and grow strategies to provide value to our customers and build loyalty through bundled products and volume discounts are bearing fruit. We will continue with these strategies to retain customers. Telkom continues to actively focus its efforts on converting revenue streams into annuity revenue and we are pleased to announce that annuity revenue which include line installations, reconnection fees and CPE sales, increased by 14.1% to R6.9 billion. Another key revenue growth area is data. Again we have been successful in growing data revenue, before inter-segmental eliminations, by 10.9% to R8.3 billion. Whilst many of our revenue growth areas including; inter alia, data and our new ventures in Africa being Multi-Links and Africa Online are currently lower margin business segments, we are also continuing to leverage our traditional voice revenues towards those products and services that have higher margins. Management will continue to focus on high growth potential revenue streams as well as high margin revenue streams. There is also a significant effort to align the cost structures of significant revenue streams throughout the business. GROUP OPERATING EXPENSES 140 Group operating expenses increased by 12.8% to R42,337 million (March 31, 2007: R37,533 million) in the year ended March 31, 2008, primarily due to a 17.9% increase in operating expenses in the mobile segment to R17,898 million (before inter-segmental eliminations). Fixed-line operating expenditure increased by 3.6% to R24,962 million (before intersegmental eliminations) due to increased employee expenses, payments to other operators, depreciation, amortisation, impairment and write-offs and services rendered, partially offset by a decrease in operating leases and selling, general and administrative expenses. The increase in mobile operating expenses of 17.9%, before inter segmental eliminations, was primarily due to increase in employee expenses and gross connections resulting in increased cost to connect customers to the network. Mobile payments to other operators also increased as a result of the increased outgoing traffic and the higher

35 volume growth of more expensive outgoing traffic terminating on other mobile networks when compared to traffic terminating on the lower cost fixed-line network. The telecommunications regulator, ICASA, limits Telkom s price increase to CPIX minus 3.5%. The prices for Telkom s regulated products and service, are therefore decreasing in real terms. In addition, competitive pressures are forcing price decreases across the board resulting in pressure on Telkom s revenues. In this environment, together with strong inflationary momentum on our operating expenditure, Telkom remains focused on maximising all cost efficiencies and align on cost structures with our revenue streams. Capability management is one of the initiatives to achieve this. We aim to continue ensuring that our cost increases are below CPIX and are proud of the fixed-line s achievement in limiting operational expenditure increases to 3.7% in the year ending March 31, 2008 given that CPIX was recorded at 10.1% at end March INVESTMENT INCOME Investment income consists of interest received on short-term investments and bank accounts. Investment income decreased by 16.2% to R197 million (March 31, 2007: R235 million), largely as a result of lower interest received from fixed deposits primarily due to lower cash balances. FINANCE CHARGES Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances. Finance charges increased by 60.3% to R1,803 million (March 31, 2007: R1,125 million) in the year ended March 31, 2008, due to a 42.0% increase in interest expense to R1,885 million (March 31, 2007: R1,327 million) as a result of the 65.7% increase in net debt to R16,617 million (March 31, 2007: R10,026 million). Net debt increased mainly as a result of the issuance of commercial paper debt with a nominal value R18,806 million during the year, as well as an increase in Vodacom s net debt for the year. This was partly offset by the repayment of R15,773 million nominal value of commercial paper bills. In addition to the increase in the interest expense, net fair value and exchange movements on financial instruments resulted in a gain of R82 million for the year ended March 31, 2008 (March 31, 2007: R202 million). Telkom Annual Report Telkom continues to focus on re-aligning its profile towards longer term debt. This is evident in the recent issuance of the TL12 and TL15 bonds.

36 Chief of finance s review continued TAXATION GROUP BALANCE SHEET The consolidated tax expense reduced to R4,704 million (March 31, 2007: R4,731 million) in the year ended March 31, The consolidated effective tax rate for the year ended March 31, 2008, was 36.5% (March 31, 2007: 34.9%). Telkom Company s effective tax rate was 24.6% for the year ended March 31, 2008 (March 31, 2007: 24.2%) and Vodacom s effective tax rate decreased to 34.1% (March 31, 2007: 36.9%). Interest bearing debt increased by R5,369 million (51.8%) in the year ended March 31, Telkom company s interest bearing debt increased with R4,279 million and Vodacom s debt increased with R538 million mainly due to investing in our fixedline and mobile networks. Our other segment s debt increased with R552 million in the current financial year due to our expansion into Africa. The increase in the Telkom Group effective tax rate in the 2008 financial year was mainly due to higher non-deductible expenses relating mostly to the impairment of Telkom Media and Africa Online assets, the increase in STC tax credits utilised in respect of the repurchases of Telkom shares and the impact of the tax rate change on deferred taxation from 29% to 28% with effect from April 1, The higher effective tax rate for Telkom Company in the year ended March 31, 2008 was primarily due to higher nondeductable expenses relating to the R217 million impairment of the Telkom Media loan and an increase of R198 million in secondary tax on companies, partially offset by higher exempt income resulting from dividends received from Vodacom and other subsidiaries. Vodacom s effective tax rate decreased in the 2008 financial year primarily due to the decrease in the rate of secondary tax on companies from 12.5% to 10%. In the financial year ended March 31, 2008, the Group redeemed the TK01 local bond with a nominal value of R4,680 million. We increased our book value of Commercial paper bills with R2,900 million and we entered into call loans and term facilities, of which R5,600 million was outstanding at year end. Subsequent to year end, we successfully issued the TL12 (due April 29, 2012) and TL15 (due April 29, 2015) bonds listed on the Bond Exchange of South Africa with a combined nominal value of R2.2 billion, and repaid the R1.6 billion bridge facility included in our interest bearing debt at March 31, The increase in the other segment s financial liabilities are mainly contributed by the Multi-Links put option of R919 million due to the acquisition of Multi-Links in the current year. Multi-Link s minorities have been granted a put option that requires Telkom to purchase all of the minorities shares. The put option is exercisable within 90 days of the second anniversary of signing of the sale agreement, being May 1, PROFIT FOR THE YEAR AND EARNINGS PER SHARE Profit for the year attributable to the equity holders of the Group decreased by 7.8% to R7,975 million (March 31, 2007: R8,646 million) for the year ended March 31, Group basic earnings per share decreased by 6.9% to 1,565.0 cents (March 31, 2007: 1,681.0 cents) and Group headline earnings per share decreased by 4.4% to 1,634.8 cents (March 31, 2007: 1,710.7 cents). In addition Vodacom s subsidiary, Vodacom Congo (RDC) s.p.r.l has an option liability with a value of R397 million (Group share: R198 million) as at March 31, 2008 for a period of maximum 8 years after December 1, Telkom continue to focus on an efficient balance sheet structure. As such we have given the market guidance to the effect that we are targeting a net debt/ebitda ratio of 1.3x over the following three years. We will continue to manage both our balance sheet and cash to extract maximum efficiencies for the business. 142 Telkom will continue to focus on restructuring and consolidating its business while concentrating on ensuring continued returns for our shareholders through share buy backs and increasing the ordinary dividend in the years going forward. For the year ending March 31, 2008, Telkom bought back R1.6 billion of shares and increased the ordinary dividend by 10% to 660 cents per share. We will also continue to drive profitable growth through data, geographic expansion and exploiting the opportunities presented by fixed and mobile integration. GROUP CASH FLOW Cash flows from operating activities increased by 13.3% to R10,603 million (March 31, 2007: R9,356 million), mainly due to lower taxation as well as an increase in cash generated from operations of R21,256 million (March 31, 2007: R20,520 million), partly offset by higher dividends paid. Cash flows utilised in investing activities increased by 35.5% to R14,106 million (March 31, 2007: R10,412 million), primarily

37 due to increased capital expenditure in both the fixed-line and mobile segments, as well as cash utilised for the purchase of Multi- Links Telecommunications (Proprietary) Limited. Cash flows from financing activities of R2,943 million (March 31, 2007: (R2,920) million) was mostly due to the R1,647 million paid for share repurchases, the repayment of the TK01 bond with a nominal value of R4,680 million on March 31, 2008 and maturing commercial paper debt of R15,773 million nominal value during the year. This was offset by the issuance of R18,806 million nominal value commercial paper bills, as well as entering into call loans and term facilities of R5,600 million to fund the redemption of the TK01 bond and other cash flows from investing activities. Summary Year ended March 31, / /2007 (in millions, except percentages) ZAR ZAR ZAR % change % change Cash generated from operations 19,724 20,520 21, Cash from operating activities (after tax, interest, dividends) 9,506 9,356 10,603 (1.6) 13.3 Investing activities (7,286) (10,412) (14,106) (42.9) (35.5) Financing activities (258) (2,920) 2,943 (1,031.8) Net increase/(decrease) in cash 1,962 (3,976) (560) (302.7) 85.9 Group Capital Expenditure Group capital expenditure increased by 16.1% to R11,900 million (March 31, 2007: R10,246 million) and represents 21.1% of Group revenue (March 31, 2007: 19.8%). Year ended March 31, / /2007 (in millions, except percentages) ZAR ZAR ZAR % change % change Fixed-line 4,900 6,594 6, Mobile 2,571 3,608 3, (4.1) Other , ,506 10,246 11, Telkom Annual Report

38 Chief of finance s review continued 144 Fixed-line capital expenditure, which includes spending on intangible assets, increased by 3.0 % to R6,794 million (March 31, 2007: R6,594 million) and represents 20.9% of fixed-line revenue (March 31,2007: 20.4%). Our focus continue to be the expansion of our capacity for growth specially broadband. This include accelerated pre provisioning of ADSL and backbone infrastructure. Baseline and revenue generating capital expenditure of R4,095 million (March 31, 2007: R3,568 million) was largely for the deployment of technologies to support the growing data services business (including ADSL footprint), links to the mobile cellular operators, service on demand customer solutions and expenditure for access line deployment in selected high growth residential areas. The continued focus on rehabilitating the access network and increasing the efficiencies in the transport network contributed to the network evolution and sustainment capital expenditure of R1,369 million (March 31, 2007: R1,200 million). Telkom continues to focus on its operations support system investment with current emphasis on workforce management, provisioning and fulfillment, assurance and customer care, hardware technology upgrades on the billing platform and performance and service management. During the year ended March 31, 2008, R841 million (March 31, 2007: R1,141 million) was spent on the implementation of systems. Mobile capital expenditure (50% of Vodacom s capital expenditure) decreased by 4.1% to R3,461 million (March 31, 2007: R3,608 million) and represents 14.4% of mobile revenue (March 31, 2007: 17.5%) which was mainly spent on the cellular network infrastructure consisting of radio, switching and transmission network infrastructure and computer software. The decrease in capital expenditure in other African countries was largely as a result of decreased investment in Tanzania, Democratic Republic of the Congo and Mozambique offset by an increase in investment in Lesotho. Other capital expenditure consists of additions to property, plant and equipment for our subsidiaries TDS Directory Operations (Proprietary) Limited, Swiftnet (Proprietary) Limited, Telkom Media (Proprietary) Limited, Africa Online Limited and Multi-Links Telecommunications Limited. Other capital expenditure, which includes spending on intangible assets, increased to R1,646 million (March 31, 2007: R44 million) and represents 84.9% of other revenue (March 31, 2007: 4.5%). efficiently to ensure service delivery by focusing on the evolution of the network and providing infrastructure for future growth. PROSPECTS AND GUIDANCE Telkom s strategy is designed to deliver and guided by our strategy, the creation of shareholders value is the underlying driver of every decision. The next 3 years we will continue to focus on transforming the business to deal with competition, concentrating on delivering innovative products and services to our customers, expanding our network and bedding down our growth drivers. We expect that competition will continue to constrain revenue growth over the next three years. Targets in a transforming industry such as ours are inherently risky, particularly in later years and investors should not place undue reliance on such targets. We are targeting a compound annual growth rate (CAGR) of revenue over the following three years in the 5% to 10% range as increased revenues from our data, broadband and converged business and our newly acquired subsidiaries are projected to mitigate the impacts of increased competition. The EBITDA margin relating to fixed-line and other segments is targeted to range between 32% and 36% over the next three years. This margin range reflects the increased operational expenditure that goes hand in hand with an aggressive customer service improvement and expansion programme, an increased contribution from lower margin business and the decline in local and national voice traffic revenue. The early stages of development in Multi-Links and Africa Online add to the expected decrease in the EBITDA margin. We expect to see improvements in the EBITDA margin within the range towards the end of our three year planning period. Capital expenditure for the fixed-line and other segments will range between 23% and 27% of revenue over the next two years. In year three capex is targeted to range between 18% and 22%. Capital expenditure is expected to be R11.3 billion in the 2009 financial year. Fixed-line capital expenditure is targeted at R7 billion and Multi-Links at USD533 million. The targeted net debt to EBITDA for the fixed-line and other segments will be 1.3 times. Telecommunications is naturally a capital intensive business which requires continued investment and longer pay back periods. It is imperative that capex is used effectively and Targets in a transforming industry such as ours are inherently risky, particularly in later years and investors should not place undue reliance on such targets.

39 Our dividend policy remains that we progressively grow the ordinary dividend each year. Given the investment in our network, expansion in current businesses, the potential acquisitions and pressure on the fixed-line and other segments EBITDA margin, no special dividend will be paid in respect of the 2008 financial year. The level of dividend going forward will be based on a number of factors including the consideration of the financial results, available growth opportunities, the Group s debt level, interest coverage, internal cash flows and resources, the repurchase of Telkom shares and other future expectations. I wish to express my appreciation to the staff of Telkom and particularly the finance team for the exemplary work done over the past financial year. Deon Fredericks Acting Chief of Finance Telkom Annual Report

40 FIVE YEAR FINANCIAL REVIEW for the years ended March 31 Amounts in accordance with IFRS CAGR (%) (in ZAR millions, except percentages) Fixed-line segment financial data (1) Revenue 31,832 32,345 32, Operating profit 9,843 8,596 8,107 (9.2) Operating profit margin (%) (71.6) EBITDA 14,206 12,178 11,839 (8.7) EBITDA margin (%) (9.8) Capital expenditure to revenue (%) Mobile segment financial data (50% of Vodacom) Revenue 11,428 13,657 17,021 20,573 24, Operating profit 2,614 3,240 4,436 5,430 6, Operating profit margin (%) EBITDA 3,879 4,796 5,908 7,123 8, EBITDA margin (%) Capital expenditure to revenue (%) Other segment financial data (1) Revenue , Operating profit (24.0) Operating profit margin (%) (47.5) EBITDA (7.8) EBITDA margin (%) (36.3) Capital expenditure to revenue (%) (1) No audited information on the redefined fixed-line and other segment is available for 2004 and Financial review (Group) Income statement data Operating revenue 40,582 43,160 47,625 51,619 56, Operating expenses (including depreciation) 31,499 32,179 33,428 37,533 42, EBITDA 16,586 17,549 20,553 19,785 20, Operating profit 9,338 11,261 14,677 14,470 14, Profit before tax 6,396 9,917 13,851 13,580 12, Profit after tax/net profit 4,658 6,835 9,328 8,849 8, Basic earnings per share (cents) , , , , Headline earnings per share (cents) , , , , Dividends per share (cents) , Balance sheet data Total assets 53,174 57,597 57,544 59,146 70, Current assets 11,423 15,045 12,731 10,376 12, Non-current assets 41,751 42,552 44,813 48,770 57, Total liabilities 31,346 31,236 28,078 27,138 37, Current liabilities 14,639 17,366 15,687 18,584 21, Non-current liabilities 16,707 13,870 12,391 8,554 15,104 (2.5) Shareholders equity 21,828 26,361 29,466 32,008 33, Total debt 17,821 15,225 12,051 11,034 18, Net debt 13,362 6,941 6,828 10,026 16, Cash flow data Cash flow from operating activities 13,884 15,711 9,506 9,356 10,603 (6.5) Cash flow used in investing activities (5,423) (6,306) (7,286) (10,412) (14,106) 27.0 Cash flow used in financing activities (6,481) (9,897) (258) (2,920) 2,943 Capital expenditure excluding intangibles 4,936 4,464 6,310 8,648 10, Operating free cash flow 9,009 10,034 7,104 3,728 2,150 (30.1) Financial ratios Operating profit margin (%) EBITDA margin (%) (2.7) Net profit margin (%) Net debt to equity (%) (5.0) After tax operating return of assets (%) Capital expenditure to revenue (%)

41 FINANCIAL REVIEW As of the beginning of the year the Telkom Group added a new segment to its financial reporting, the other segment. The comparative information in this annual report has been updated to reflect the changes to Telkom s reporting segments. Our operating structure comprises three segments, fixed-line, mobile and other. Our fixed-line segment provides fixed-line voice and data communications services through Telkom. Our mobile segment provides mobile services through its 50% joint interest in Vodacom. Our other segment provides directory services through our TDS Directory Operations Group, fixed mobile, data and other international communications services in Nigeria, through our newly acquired Multi-Links subsidiary, Internet services outside South Africa, through our Africa Online subsidiary, and wireless data services, through our Swiftnet subsidiary, and includes Telkom Media. TDS Directory Operations and Swiftnet were previously included in our fixed-line segment. Telkom Group s segmental results We proportionately consolidate Vodacom s results into the Telkom Group s consolidated financial statements. This means that we include 50% of Vodacom s results in each of the line items in the Telkom Group s consolidated financial statements and in the year to year discussion below. We fully consolidate our TDS Directory Operations, Multi-Links, Africa Online, Swiftnet and Telkom Media subsidiaries in the Telkom Group s consolidated financial statements. CONSOLIDATED RESULTS The following table shows information related to our operating revenue, operating expenses, operating profit, profit for the year, profit margin, EBITDA and EBITDA margin for the periods indicated. Year ended March 31, / 2008/ (in millions, except percentages) ZAR % ZAR % ZAR % % change % change Operating revenue 47, , , Fixed-line 31, , , Mobile 17, , , Other , Intercompany eliminations (2,180) (4.5) (2,278) (4.4) (2,369) (4.2) Other income (1) (20.0) 39.1 Fixed-line (28.2) 48.8 Mobile (16.0) 33.3 Other Intercompany eliminations (45) (9.4) (46) (12.0) (86) (16.1) Operating expenses 33, , , Fixed-line 22, , , Mobile 12, , , Other , Intercompany eliminations (2,225) (6.7) (2,324) (6.2) (2,353) (5.6) Operating profit (2) 14, , , (1.4) 0.1 Fixed-line 9, , , (12.7) (5.7) Mobile 4, , , Other (48.2) Intercompany eliminations (102) (0.7) Operating profit margin (%) (9.1) (8.2) Fixed-line (13.9) (6.4) Mobile (1.9) Other (74.7) Profit for the year attributable to equity holders of Telkom 9, , , (5.9) (7.8) Profit margin (%) (13.5) (15.0) EBITDA (2) (3) 20, , , (3.7) 4.2 Fixed-line 14, , , (14.3) (2.8) Mobile 5, , , Other (22.9) Intercompany eliminations n/a n/a EBITDA margin (%) (11.3) (4.4) Telkom Annual Report (1) Other income includes profit and losses on disposal of investments, property, plant and equipment and intangible assets. (2) Total operating profit and EBITDA and mobile operating profit and EBITDA include our 50% share of a reversal of Vodacom s impairment loss of R53 million in the 2006 financial year due to an increase in the fair value of the assets in Mozambique and an impairment loss of R30 million and R23 million in the 2008 and 2007 financial years respectively, in respect of the assets in Mozambique due to a decrease in the fair value of the assets. (3) EBITDA represents profit for the year, which includes profit on sale of investments, before taxation, finance charges, investment income and depreciation, amortisation, impairments and write-offs. We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for comparing a company s underlying operating profitability with that of other companies as it is not influenced by past capital expenditures or business acquisitions, a company s capital structure or the relevant tax regime. This is particularly the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a company s ability to service its long-term debt and other fixed obligations and to fund its continued growth. EBITDA is not a US GAAP or IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from operating activities determined in accordance with US GAAP or IFRS or as a measure of liquidity. EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. In addition, the calculation of EBITDA for the maintenance of our covenants contained in our TL20 bond is based on accounting policies in use, consistently applied, at the time the indebtedness was incurred. As a result, EBITDA for purposes of those covenants is not calculated in the same manner as it is calculated in the above table.

42 Financial review continued EBITDA can be reconciled to operating profit as follows: Year ended March 31, (in millions) ZAR ZAR ZAR Fixed-line EBITDA 14,206 12,178 11,839 Depreciation, amortisation, impairments and write-offs (4,363) (3,582) (3,732) Operating profit 9,843 8,596 8,107 Mobile EBITDA 5,908 7,123 8,217 Depreciation, amortisation and impairments (1,472) (1,693) (1,970) Operating profit 4,436 5,430 6,247 Other EBITDA Depreciation, amortisation, impairments and write-offs (41) (40) (143) Operating profit Group operating revenue Operating revenue increased in the years ended March 31, 2008 and 2007 due to increased operating revenue in our mobile other and fixed-line segments. Vodacom s operating revenue increased in the 2008 financial year primarily due to increased airtime, data, interconnection and equipment sales revenue as a result of strong customer growth. Vodacom s operating revenue increased in the 2007 financial year primarily due to increased data, interconnection and equipment sales revenue as a result of continued customer growth. The increase in revenue in our other segment in the 2008 financial year was primarily due to the inclusion in the 2008 financial year of revenue generated by our newly acquired subsidiaries, Multi-Links and Africa Online. Fixed-line operating revenue remained flat with a marginal increase of 0.7% in the 2008 financial year primarily due to continued growth in data services, intercon - nection revenues and higher revenue from subscription based calling plans, partially offset by a decrease in local and long distance traffic. The increase in fixed-line operating revenue in the 2007 financial year was primarily due to continued growth in data revenue and higher subscriptions and connections revenue partially offset by lower average traffic tariffs, lower local and long distance traffic and lower interconnection revenue. These additional revenue streams were further supported by the continued growth in advertising revenue from our subsidiary, TDS Directory Operations, offset in part by a slight reduction in wireless data services revenue from our subsidiary, Swiftnet due to increased competition in the wireless data environment. Revenue from directory services increased in the years ended March 31, 2007 and 2008 primarily due to annual tariff increases and increased marketing and online efforts, resulting in increased spending on advertising by existing customers and additional advertising revenue from new customers. Fixed-line segment operating revenue The following table shows operating revenue for our fixed-line segment broken down by major revenue streams and as a percentage of total revenue for our fixed-line segment and the percentage change by major revenue stream for the periods indicated. Fixed-line operating revenue 148 Year ended March 31, / 2008/ (in millions, except percentages) ZAR % ZAR % ZAR % % change % change Subscriptions and connections 5, , , Traffic 17, , , (4.7) (4.7) Local 5, , , (16.0) (15.6) Long distance 3, , , (13.6) (17.5) Fixed-to-mobile 7, , , (1.2) International outgoing 1, (1.3) (0.2) Subscription based calling plans , Interconnection 1, , , (0.9) 7.2 Data 6, , , Sundry revenue Fixed-line operating revenue 31, , ,

43 Fixed-line operating revenue increased in the 2008 financial year primarily due to continued growth in data services and higher revenue from subscription based calling plans, intercon - nection and subscriptions and connections, partially offset by a decrease in traffic revenue, particularly local and long distance traffic revenue. Fixed-line operating revenue increased in the 2007 financial year, primarily due to continued growth in data services and higher subscriptions and connections revenue, partially offset by lower average traffic tariffs, lower local and long distance traffic and lower interconnection revenue. Fixed-line operating revenue was adversely impacted in both the 2008 and 2007 financial years due to a decrease in the number of residential postpaid PSTN lines primarily as a result of customer migration to mobile and higher bandwidth products such as ADSL and lower connections, and a decrease in the number of prepaid PSTN lines as a result of customer migration to mobile services and our residential postpaid PSTN services to enable access to subscription based calling plans and was positively impacted by our increase in ISDN channels, ADSL services and, to a lesser extent, business postpaid PSTN lines. In addition, traffic was adversely affected in both years by the increasing substitution of calls placed using mobile services rather than our fixed-line service and dial-up traffic being substituted by our ADSL service, as well as the decrease in the number of prepaid and residential postpaid PSTN lines and increased competition in our payphones business. As a result, traffic declined 4.7% in both the 2008 and 2007 financial years. Revenue per fixed access line decreased 0.5% to R5,250 in the 2008 financial year from R5,275 in the 2007 financial year primarily due to the decline in traffic tariffs and local traffic volumes, partially offset by increased subscription based calling plans, interconnection and subscriptions and connections tariffs. Revenue per fixed access decreased 0.5% to R5,275 in the 2007 financial year from R5,304 in the 2006 financial year primarily due to the decline in traffic tariffs, lower local traffic volumes and lower interconnection revenue, partially offset by increased subscriptions and connection tariffs. Subscriptions and connections Revenue from subscriptions and connections consists of revenue from connection fees, monthly rental charges, value added voice services and the sale and rental of customer premises equipment for postpaid and prepaid PSTN lines, including ISDN channels and private payphones. Subscriptions and connections revenue is principally a function of the number and mix of residential and business lines in service, the number of private payphones in service and the corresponding charges. The following table sets forth information related to our fixed-line subscription and connection revenue during the periods indicated. Fixed-line subscription and connection revenue Year ended March 31, / 2008/ % change % change Total subscriptions and connections revenue (ZAR millions, except percentages) 5,803 6,286 6, Total subscription access lines (thousands, except percentages) (1) 4,551 4,490 4,395 (1.3) (2.1) Postpaid PSTN (2) 2,996 2,971 2,893 (0.8) (2.6) ISDN channels Prepaid PSTN (6.9) (6.5) Private payphones (25.0) (16.7) Telkom Annual Report 2008 (1) Total subscription access lines are comprised of PSTN lines, including ISDN lines and private payphones, but excluding internal lines in service and public payphones. Each analog PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access channels. (2) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre. 149 Revenue from subscriptions and connections increased in the years ended March 31, 2008 and 2007 mainly due to increased tariffs as well as an increase in the number of ISDN lines and, to a lesser extent, business postpaid PSTN lines, partially offset by lower residential postpaid PSTN lines and prepaid PSTN lines. The average monthly prices for subscriptions increased by 6.0% on September 1, 2005, 8.3% on August 1, 2006 and 12.0% on August 1, In the 2007 financial year, revenue from the sale of customer premises equipment increased as a result of the reclassification of the related leases previously accounted for as operating leases to finance leases, resulting in the recognition of income from the lease of customer premises equipment at the time of sale as opposed to over the life of the contract. In addition, increased revenue was received from voice enhanced services, mainly as a result of increased penetration. The decrease in the number of residential postpaid PSTN lines in service in both the 2008 and 2007 financial years was primarily as a result of customer migration to mobile and higher bandwidth products such as ADSL and lower connections. The

44 Financial review continued increase in the number of postpaid ISDN channels was driven by increased demand for higher bandwidth and functionality. The decrease in prepaid PSTN lines in both the 2008 and 2007 financial years was primarily due to continued migration to mobile services and our residential postpaid PSTN services to enable access to subscription based calling plans. In addition, we relaxed our credit policies which led to fewer migrations of our postpaid customers to prepaid service in the 2008 and 2007 financial years. Traffic Traffic revenue consists of revenue from local, long distance, fixed-to-mobile and international outgoing calls, international voice over Internet Protocol services and subscription based calling plans. Traffic revenue is principally a function of tariffs and the volume, duration and mix between relatively more expensive domestic long distance, international and fixed-tomobile calls and relatively less expensive local calls. Telkom has in recent years introduced calling plans as a customer retention strategy in order to defend revenues. These calling plan arrangements comprise monthly subscriptions for access line rental, value added services and free or discounted rates on calls. Traffic revenue from calling plan subscriptions was reported as part of local traffic revenue in financial years prior to the 2007 financial year, as most of these calling plans related to local calls only and the amounts were insignificant. The access line rentals and value added services revenue components of calling plan arrangements are included in subscriptions and connections revenue. In response to the significant growth in calling plan arrangements, the need arose to separate traffic revenue resulting from subscription based calling plans into annuity revenue and the respective traffic revenue streams. Commencing in the 2007 financial year, subscription based on calling plans revenue includes traffic annuity revenue related to calling plans. Discounted and out of plan traffic relating to these calling plans is disclosed under the applicable traffic revenue streams. Traffic includes dial up Internet traffic. Telkom has reclassified calling plans from local, long distance and fixed-to-mobile traffic into a separate line item to disclose traffic from subscription based calling plans in the 2007 and 2008 financial year. Traffic for the 2006 financial year was not restated. The following table sets forth information related to our fixed-line traffic revenue for the periods indicated. Fixed-line traffic revenue Year ended March 31, / 2008/ % change % change 150 Local traffic revenue (ZAR millions, except percentages) 5,753 4,832 4,076 (16.0) (15.6) Local traffic (millions of minutes, except percentages) (1) 18,253 14,764 11,317 (19.1) (23.3) Long distance traffic revenue (ZAR millions, except percentages) 3,162 2,731 2,252 (13.6) (17.5) Long distance traffic (millions of minutes, except percentages) (1) 4,446 4,224 3,870 (5.0) (8.4) Fixed-to-mobile traffic revenue (ZAR millions, except percentages) 7,647 7,646 7,557 (1.2) Fixed-to-mobile traffic (millions of minutes, except percentages) (1) 4,064 4,103 4, International outgoing traffic revenue (ZAR millions, except percentages) 1, (1.3) (0.2) International outgoing traffic (millions of minutes, except percentages) (1) International Voice Over Internet Protocol (millions of minutes, except percentages) (2) (54.2) 13.2 Subscription based calling plans revenue (ZAR millions, except percentages) 543 1, Subscription based calling plans (millions of minutes, except percentages) 1,896 2, Total traffic revenue (ZAR millions, except percentages) 17,563 16,740 15,950 (4.7) (4.7) Total traffic (millions of minutes, except percentages) (1) 27,361 25,583 23,031 (6.5) (10.0) Average total monthly traffic minutes per average monthly access line (minutes) (3) (5.4) (8.6) (1) Traffic, other than international Voice Over Internet Protocol traffic, is calculated by dividing total traffic revenue by the weighted average tariff during the relevant period. Traffic includes dial up internet traffic. (2) International voice over Internet Protocol traffic is based on the traffic reflected in invoices. (3) Average monthly traffic minutes per average monthly access line are calculated by dividing the total traffic by the cumulative number of monthly access lines in the period.

45 Traffic revenue declined in the 2008 and 2007 financial years primarily due to lower average traffic tariffs and lower local traffic volumes partially offset by increased subscription based calling plans and revenue, international outgoing and fixed-tomobile traffic. ICASA approved a 3.0% reduction in the overall tariffs for services in the basket for which there is a price cap effective September 1, 2005, a 2.1% reduction in the overall tariffs for services in the basket effective August 1, 2006 and a 1.2% reduction in the overall tariffs for services in the basket effective August 1, Traffic was adversely affected in both the 2008 and 2007 financial years by the increasing substitution of calls placed using mobile services rather than our fixed-line service and dialup traffic being substituted by our ADSL service, as well as the decrease in the number of prepaid and residential postpaid PSTN lines and increased competition in our payphone business. Local traffic revenue decreased in the 2008 financial year primarily due to significantly lower traffic resulting primarily from Internet call usage being substituted by our ADSL service, the substitution of calls placed using mobile services and discounts to business customers, partially offset by increased local off peak tariffs and traffic volumes related to Telkom Closer packages. Local traffic revenue decreased in the 2007 financial year due to lower traffic resulting primarily from Internet call usage being substituted by our ADSL service and the substitution of calls placed using mobile services. We increased penetration of discount and subscription based calling plans to stimulate usage in the 2008 and 2007 financial years and to counteract mobile substitution, which effectively lowers the cost to the customer. On September 1, 2005, we decreased the price of local peak calls after the first unit by 5.0% to 38 SA Cents per minute (VAT inclusive). This price was unchanged on August 1, 2006 and August 1, On August 1, 2007, the price of local off peak calls increased 4.1% on average. Long distance traffic revenue decreased in the 2008 financial year mainly due to a decrease in average long distance tariffs and, to a lesser extent, decreased long distance traffic, partially offset by increased traffic related to Telkom Closer packages and Worldcall. Long distance traffic revenue decreased in the 2007 financial year mainly due to a decrease in average long distance tariffs, which was partially offset by increased long distance traffic. We decreased our fixed-line long distance traffic tariffs by 10% on September 1, 2005, a further 10% on August 1, 2006 and a further 10% on August 1, Revenue from fixed-to-mobile traffic consists of revenue from calls made by our fixed-line customers to the three mobile networks in South Africa and is primarily a function of fixed-to-mobile tariffs and the number, the duration and the time of calls. Fixed-tomobile traffic revenue decreased in the 2008 financial year due to higher discounts offered to customers in order to retain traffic, partially offset by higher traffic related to the Telkom Closer packages. Fixed-to-mobile traffic revenue was flat in the 2007 financial year. Increased fixed-to-mobile traffic was partially offset by higher discounts offered to customers in order to retain traffic on our network. The increase in fixed-to-mobile traffic in the 2008 and 2007 financial years was primarily due to discounts offered to larger customers on fixed-to-mobile calls. Revenue from international outgoing traffic consists of revenue from calls made by our fixed-line customers to international destinations and from international voice over Internet Protocol services and is a function of tariffs and the number, duration and mix of calls to destinations outside South Africa. In the 2008 and 2007 financial years, international outgoing traffic revenue declined primarily as a result of a decrease in the average international outgoing tariffs, partially offset by an increase in international outgoing traffic primarily as a result of the reduced tariffs. The average tariffs to all international destinations decreased by 11.1% on August 1, 2006 and by 9.0% on August 1, Revenue from subscription based calling plans include revenue from Telkom s subscription based plans, Telkom Closer and Supreme Call, which are bundled products on post-paid PSTN lines that include discounted rates and free minutes for a fixed monthly subscription fee. In the 2008 financial year, revenue from subscription based calling plans increased by 98.7% primarily due to a 69.4% increase in customers subscribing to these packages. Interconnection We generate revenue from interconnection services for traffic from calls made by other operators customers that terminate on or transit through our network. Revenue from interconnection services includes payments from domestic mobile, domestic fixed and international operators regardless of where the traffic originates or terminates. Telkom Annual Report

46 Financial review continued The following table sets forth information related to interconnection revenue for the years indicated. Interconnection revenue Year ended March 31, / 2008/ ZAR ZAR ZAR % change % change Interconnection revenue (ZAR millions, except percentages) 1,654 1,639 1,757 (0.9) 7.2 Interconnection revenue from domestic mobile operators (ZAR millions, except percentages) Domestic mobile interconnection traffic (millions of minutes, except percentages) (1) 2,299 2,419 2, Interconnection revenue from domestic fixed-line operators (ZAR millions, except percentages) 28 Domestic fixed-line interconnection traffic (millions of minutes, except percentages) (2) 113 Interconnection revenue from international operators (ZAR millions, except percentages) (7.9) 8.3 International interconnection traffic (millions of minutes, except percentages) (2) 1,355 1,321 1,280 (2.5) (3.1) (1) Domestic mobile interconnection traffic, other than international outgoing mobile traffic, is calculated by dividing total domestic mobile and domestic fixed interconnection traffic revenue, respectively, by the weighted average domestic mobile and domestic fixed interconnection traffic tariffs during the relevant period. International outgoing mobile traffic is based on the traffic registered through the respective exchanges and reflected in interconnection invoices. (2) International interconnection and domestic fixed-line interconnection traffic is based on the traffic registered through the respective exchanges and reflected on interconnection invoices. 152 Interconnection revenue from domestic mobile operators includes revenue for call termination and international outgoing calls from domestic mobile networks, as well as access to other services, such as emergency services and directory enquiry services. Interconnection revenue from domestic mobile operators increased in the 2008 and 2007 financial years mainly due to increased traffic from domestic mobile operators, partially offset by lower average tariffs on mobile international outgoing calls. Domestic mobile interconnection traffic increased in the years ended March 31, 2008 and 2007 primarily due to an overall increase in mobile calls as a result of a growing mobile market, partially offset by increased mobile-to-mobile calls bypassing our network. Interconnection revenue from domestic mobile operators includes fees paid to our fixed-line business by Vodacom of R468 million in the year ended March 31, 2008, R468 million in the year ended March 31, 2007 and R464 million in the year ended March 31, Fifty percent of these amounts were attributable to our interest in Vodacom and were eliminated from the Telkom Group s revenue on consolidation. Interconnection revenue from domestic fixed-line operators includes fees paid by Neotel, underserviced area licence holders and value added network service providers for call termination and international outgoing calls, as well as access to other services, such as emergency services and directory inquiry services. With effect from May 23, 2007, ICASA approved interconnection rates with Neotel, underserviced area licence holders and value added network service providers for interconnection on our fixed-line network. In October 2007, Neotel commenced interconnection with Telkom. In July 2007, Telkom began interconnection with the underserviced area licence holders and in November 2007, value added network service providers. We expect interconnection revenue to increase as a result of the entrance of Neotel and the further liberalisation of the South African telecommunications industry, which may partially mitigate declines in revenue in other areas. Interconnection revenue from international operators includes amounts paid by foreign operators for the use of our network to terminate calls made by customers of such operators and payments from foreign operators for interconnection hubbing traffic through our network to other foreign networks. Interconnection revenue from international operators increased in the year ended March 31, 2008 primarily due to the weakening of the Rand against the SDR, the notional currency in which international rates are determined, and increased switched hubbing traffic volumes due to a reduction in tariffs to stimulate competitiveness, partially offset by lower volumes and settlement rates. Interconnection revenue from international operators decreased in the year ended March 31, 2007 primarily due to decreased settlement rates and volume discounts and decreased switched hubbing traffic volumes, partially offset by increased international termination tariffs and the weakening of the Rand. Data Data services comprise data transmission services, including leased lines and packet based services, managed data networking services and Internet access and related information technology services. In addition, data services include revenue from ADSL. Revenue from data services is mainly a function of the number of subscriptions, tariffs, bandwidth and distance. The following table sets forth information related to revenue from data services for the periods indicated.

47 Data services revenue Year ended March 31, / 2008/ % change % change Data services revenue (ZAR millions, except percentages) 6,674 7,489 8, Leased lines and other data revenue (1) 5,304 5,828 6, Leased line facilities revenues from mobile operators 1,370 1,661 1, Number of managed network sites (at period end) 16,887 21,879 25, Internet dial-up subscribers (at period end) 228, , ,732 (8.1) 15.3 Internet ADSL subscribers (at period end) 53,997 92, , Total ADSL subscribers (at period end) (2) 143, , , (1) Leased lines and other data revenue includes all data services revenue other than leased line facilities revenue from mobile operators. (2) Excludes Telkom internal ADSL services of 751, 523 and 249 as of March 31, 2008, 2007 and 2006, respectively. Our data services revenue increased in both the 2008 and 2007 financial years primarily due to increased revenue from data connectivity service, including ADSL connectivity and SAIX, Internet access, and managed data networks, including VPN Supreme and increased revenue from leased line facilities from mobile operators. These increases were partially offset by decreased tariffs for leased line facilities to mobile operators and data connectivity services. Revenue from leased line facilities from mobile operators increased in the years ended March 31, 2008 and 2007 primarily due to the roll-out of third generation and universal mobile telecommunications system products by the mobile operators. Operating revenue from our data services included R1,028 million, R907 million and R845 million in revenue received by our fixedline business from Vodacom in the years ended March 31, 2008, 2007 and 2006, respectively. These amounts were attributable to our interest in Vodacom and were eliminated from the Telkom Group s revenue on consolidation. Mobile operating revenue and profits Sundry revenue Sundry revenue includes revenue relating to collocation of other licensed operators on Telkom owned properties, the sale of materials and revenue related to the recovery of costs for work performed on behalf of other licensed operators. Sundry revenue increased by 18.8% to R227 million in the 2008 financial year and 38.4% to R191 million in the 2007 financial year from R138 million in the 2006 financial year primarily due to an increase in prices, and in the 2007 financial year, volumes, for collocation and recoveries. Mobile segment operating revenue The following table shows information related to our 50% share of Vodacom s operating revenue and operating profit broken down by Vodacom s South African operations and operations in other African countries for the periods indicated. All amounts in this table and the discussion of our mobile segment that follows represent 50% of Vodacom s results of operations unless otherwise stated and are before the elimination of intercompany transactions with Telkom. Year ended March 31, / 2008/ (in millions, except percentages) ZAR % ZAR % ZAR % % change % change Telkom Annual Report Operating revenue 17, , , South Africa 15, , , Other African countries 1, , , Operating profit (1) 4, , , South Africa 4, , , Other African countries (1) Mobile operating profit and mobile EBITDA include our 50% share of a reversal of Vodacom s impairment loss of R53 million in the 2006 financial year due to an increase in the fair value of the assets in Mozambique and an impairment loss of R23 million and R30 million in the 2007 and 2008 financial years, respectively, in respect of the assets in Mozambique due to a decrease in the fair value of the assets.

48 Financial review continued Mobile segment revenue The following table shows our 50% share of Vodacom s revenue broken down by major revenue type and as a percentage of total operating revenue for our mobile segment and the percentage change by revenue type for the periods indicated. Mobile operating revenue Year ended March 31, / 2008/ (in millions, except percentages) ZAR % ZAR % ZAR % % change % change Airtime 10, , , Data 1, , , Interconnection 3, , , Equipment sales 1, , , International airtime Other sales and services (3.8) 20.5 Mobile operating revenue 17, , , Vodacom s operating revenue increased in the 2008 and 2007 financial years primarily due to increased airtime, data, interconnection and equipment sales revenue as a result of continued customer growth. Vodacom s equipment sales further increased in the 2008 financial year due to the added functionality of new phones based on new technologies and in the 2007 financial year due to the continued uptake of new handsets in South Africa as a result of cheaper Rand-prices of new handsets and the added functionality of new phones based on new technologies. Our 50% share of Vodacom s revenue from operations outside of South Africa increased to R2,697 million for the year ended March 31, 2008 from R2,069 million for the year ended March 31, 2007 from R1,486 million in the year ended March 31, The increase in Vodacom s operating revenue from other African countries in the 2008 and 2007 financial years was primarily due to substantial increases in the number of customers in Vodacom s operations, particularly in Tanzania, the Democratic Republic of the Congo and Mozambique, and the weakening of the Rand in the 2008 and 2007 financial year, which resulted in higher Rand converted revenue, partially offset by lower ARPU resulting from the higher volume of lower spending prepaid customers. Revenue from Vodacom s other African countries as a percentage of Vodacom s total mobile operating revenue increased to 11.2% in the year ended March 31, 2008 from 10.1% in the year ended March 31, 2007 and 8.7% in the year ended March 31, A large part of the growth in mobile services was due to the success of prepaid services and the increased growth in contract customers due to prepaid customers migrating to contracts. South African contract ARPU decreased to R486 per month in the 2008 financial year from R517 per month in the 2007 financial year and R572 per month in the 2006 financial year. South African prepaid ARPU decreased to R62 per month in the 2008 financial year from R63 per month in the 2007 financial year and R69 per month in the 2006 financial year. In the 2008, 2007 and 2006 financial years, contract and prepaid customer ARPU were also negatively impacted by the high growth in Vodacom s hybrid contract product, Family Top Up, which contributed to the migration of higher spending prepaid customers, who tend to spend less than existing contract customers, to contracts. In the 2007 financial year, Vodacom changed its definition of active customers to exclude calls forwarded to voic from the definition of revenue generating activity for a six-month period, resulting in the deletion of approximately 3 million customers. Prepaid ARPU was positively impacted by this temporary rule change in the 2007 financial year. Vodacom subsequently changed its definition of revenue generating activity back to include calls forwarded to voic effective September 1, Such SIM cards were disconnected from the network after being inactive for a 215 consecutive day period. Since implementing this change, prepaid SIM cards remaining in an active state on the network, with only call forwarding to voic and no other revenue generating activities, increased significantly. Vodacom therefore implemented a supplementary disconnection rule in September 2007 to disconnect inactive prepaid SIM cards after 13 months of being kept in an active state, by call forwarding to voic only, and not having has any other revenue generating activity on Vodacom s network. The implementation of the supplementary disconnection rule led to the disconnection of an additional 2.9 million prepaid SIM cards in September 2007, which resulted in higher prepaid ARPU than would have otherwise occurred. Approximately 85.3% of Vodacom s South African mobile customers were prepaid customers at March 31, 2008 and approximately 93.4% of all gross connections were prepaid customers in the 2008 financial year. Vodacom expects the number of prepaid mobile users to continue to grow to a greater

49 extent than contract mobile users. The increasing number of prepaid users, who tend to have lower average usage, and the lower overall usage as the lower end of the market is penetrated have historically resulted in decreasing overall average revenue per customer. Total South African ARPU remained stable at R125 per month in the 2008 financial year, after decreasing in the 2007 financial year to R125 per month from R139 per month in the 2006 financial year. Total South African ARPU remained stable in the 2008 financial year, despite declining South African contract and prepaid ARPU, due to a shift in the customer mix to higher spending contract customers, which represented 14.3% of total South African customers as of March 31, 2008 compared to 13.1% as of March 31, Airtime revenue Vodacom s airtime revenue increased in the years ended March 31, 2008 and March 31, 2007 primarily due to continued customer growth, partially offset in the 2007 financial year by an overall continued decline in ARPU resulting from the effect of growth in lower spending prepaid customers. As Vodacom s primary market in South Africa continues to mature and Vodacom continues to connect more marginal customers in its South African operations, Vodacom expects that growth in airtime in South Africa will continue to slow. Total customers increased 12.7% and 28.2% in the years ended March 31, 2008 and 2007, respectively, primarily due to strong prepaid customer growth in South Africa and significant customer growth in Vodacom s operations outside of South Africa, particularly in Tanzania, the Democratic Republic of the Congo and Mozambique in the 2008 and 2007 financial years. New products, packages and services also had a role in Vodacom s customer growth in the 2007 financial year. Data revenue Vodacom derives data revenue from mobile data, including short messaging services, or SMSs, and multimedia messaging services, or MMSs, general packet radio services, or GPRS, and third generation services, or 3G. Data revenue contributed 10.4% of Vodacom s total revenue in the year ended March 31, 2008, up from 8.1% in the year ended March 31, 2007 and 6.0% in the year ended March 31, Vodacom s mobile data revenue increased in the year ended March 31, 2008 primarily due to higher penetration levels influenced by more affordable product offerings. Vodacom s mobile data revenue increased in the year ended March 31, 2007 primarily due to significant growth in SMS usage and the continued roll-out of data initiatives such as Vodafone Mobile Connect Cards, Vodafone Live!, Mobile TV, BlackBerry and the continued delivery of wireless application services. In South Africa, Vodacom transmitted 4.7 billion SMSs over its network in the 2008 financial year, compared to 4.5 billion SMSs in the 2007 financial year. There was an increase in users of GPRS in the 2008 financial year, with the number of GPRS users increasing to approximately 4.7 million as of March 31, 2008 from approximately 2.8 million as of March 31, 2007 and approximately 1.4 million as of March 31, The number of active data users includes approximately 1.4 million MMS users, approximately 370,000 data card and USB modem users, approximately 1.3 million 3G/HSDPA handsets, approximately 1.4 million Vodafonelive! users and approximately 31,000 Unique Mobile TV users as of March 31, 2008, compared to approximately 1.2 million MMS users, approximately 139,000 data card and USB modem users, approximately 584,000 3G/HSDPA handsets, approximately 899,000 Vodafonelive! users and approximately 33,000 Unique Mobile TV users as of March 31, As of March 31, 2008 Vodacom had 32,273 Blackberry users registered on its network, compared to approximately 23,328 as of March 31, Vodacom expects that the broad introduction of always on faster response and generally higher speed packetswitched data services, such as GPRS and universal mobile telecommunications system, or UMTS, will provide the platform for future value-added services. Interconnection revenue Vodacom s interconnection revenue increased in the years ended March 31, 2008 and March 31, 2007 primarily due to an increase in the number of calls terminating on Vodacom s network as a result of the increased number of Vodacom s customers and South African mobile users generally. The growth in the 2008 and 2007 financial years was also attributable to the growth in the substitution of fixed-line calls by mobile calls and incoming traffic resulting from an overall increase in the customer base of other mobile operators. The increases were partially offset by a reduced number of fixed-line calls from Telkom s network terminating on Vodacom s network. The termination rate Telkom pay to Vodacom and the mobile-tomobile interconnection rates have not changed in the three years ended March 31, Interconnection revenue in our mobile segment included R1,482 million, R1,454 million and R1,409 million in the years ended March 31, 2008, 2007 and 2006, respectively, for calls received from our fixed-line business, which were eliminated from the Telkom Group s revenue on consolidation. Equipment sales Vodacom s equipment sales increased in the 2008 and 2007 financial years primarily due to the growth of Vodacom s customer base and the continued uptake of new handsets in South Africa as a result of cheaper Rand-prices of new handsets and the added functionality of new phones based on new technologies such as 3G enabled phones, camera phones and colour screens. Sales of the Vodafone live! handset increased significantly to 2,793,710 handsets in the 2008 financial year from 1,994,269 handsets in the 2007 financial year. The average price per handset sold was R1,052 in the 2008 financial year compared to R1,067 in the 2007 financial year. International airtime International airtime revenues are predominantly from international calls by Vodacom customers, roaming revenue from Telkom Annual Report

50 Financial review continued Vodacom s customers making and receiving calls while abroad and revenue from international customers roaming on Vodacom s networks. International airtime increased 40.6% to R918 million in the year ended March 31, 2008 and 34.4% to R653 million in the year ended March 31, 2007 primarily as a result of an increase in customers resulting in increased traffic. Other mobile revenue Revenue from other sales and services includes revenue from Vodacom s cell captive insurance vehicle, wireless application services provider, or WASP, revenue, site sharing rental income as well as other revenue from non core operations. Vodacom s other sales and services revenue increased 20.5% to R153 million in the 2008 financial year primarily due to an increase in inactivated starter packs which do not contain an expiration date, but which are recognised as income after a period of 36 months. Vodacom s other sales and services revenue decreased 3.8% to R127 million in the 2007 financial year primarily due to lower income recognised as a result of a reduction in inactivated starter packs which do not contain an expiration date, partially offset by higher revenue of Cointel and higher site rental income. Other segment operating revenue Our other operating revenue is derived principally from directory services, through our TDS Directory Operations Group, fixed, mobile, data, long distance and international communications services throughout Nigeria, through our 75% owned subsidiary, Multi-Links, Internet services outside South Africa, through our Africa Online subsidiary, and wireless data services, through our Swiftnet subsidiary, and includes 100% of the losses of Telkom Media. The following table shows the operating revenue for our other segment broken down by major revenue streams and the percentage change by major revenue stream for the periods indicated. Other operating revenue Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change TDS Directory Operations Multi-Links 845 n/a n/a Africa Online n/a n/a Swiftnet (10.2) (11.3) Telkom Media 14 n/a n/a Other operating revenue , Our other operating revenue increased in the 2008 financial year primarily due the inclusion in the current year of revenue generated by our newly acquired subsidiaries, Multi-Links and Africa Online. Multi-Links, which was acquired with effect from May 1, 2007, contributed R845 million from its customers in the Nigerian market since its acquisition, and Africa Online, which was acquired with effect from February 23, 2007, increased the revenue contribution to the Group from R8 million during the 2007 financial year to R110 million during the 2008 financial year. These additional revenue streams were further supported by the continued growth in advertising revenue from our subsidiary, TDS Directory Operations, offset in part by a slight reduction in wireless data services revenue from our subsidiary, Swiftnet due to increased competition in the wireless data environment. Revenue from directory services increased in the years ended March 31, 2007 and 2008 primarily due to annual tariff increases and increased marketing and online efforts, resulting in increased spending on advertising by existing customers and additional advertising revenue from new customers. During the 2008 financial year, R4 million of revenue for TDS Directory Operations was generated through the investment in TDS Directory Operations Namibia, which was acquired in January 2007 to provide directory services in Namibia. Group other income Other income includes profit on the disposal of investments, property, plant and equipment and intangible assets. The increase in fixed-line other income in the 2008 financial year was primarily due to the disposal of more properties at a higher value during the 2008 financial year. The decrease in fixed-line other income in the 2007 financial year was primarily due to lower sales of assets and properties as well as a decrease in profit on disposal of investments, which resulted from the reclassification of assets held by the Cell captive to an annuity policy that qualified as a plan asset, effective June 1, The profits and losses that would have previously been included in other income are now treated as movements in the plan assets funding the post retirement medical aid obligation.

51 Group operating expenses Group operating expenses increased 12.8% to R42,337 million (March 31, 2007: R37,533 million) in the year ended March 31, 2008, primarily due to a 17.9% increase in operating expenses in the mobile segment to R17,898 million (before inter-segmental eliminations). Fixed-line operating expenditure increased by 3.6% to R24,962 million (before inter-segmental eliminations) due to increased employee expenses, payments to other operators, depreciation, amortisation, impairment and write-offs and services rendered, partially offset by a decrease in operating leases and selling, general and administrative expenses. Operating expenses of 17.9%, before inter segmental eliminations, was primarily due to increase in employee expenses and gross connections resulting in increased cost to connect customers to the network. Mobile payments to other operators also increased as a result of the increased outgoing traffic and the higher volume growth of more expensive outgoing traffic terminating on other mobile networks when compared to traffic terminating on the lower cost fixed-line network. Operating expenses increased in the years ended March 31, 2008 and 2007 as a result of increased operating expenses in our mobile, other and fixed-line segments. The increase in mobile operating expenses in the 2008 financial year was primarily due to inflationary factors and growth in the business, which led to increased selling, general and administrative expenses to support the expansion of 3G, growth in Vodacom s South African and African operations and increased competition, increased payments to other network operators due to higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile networks, higher employee costs as a result of increased headcount as well as increased depreciation, amortisation and impairment. The increase in mobile operating expenses in the 2007 financial year was primarily due to increased selling, general and administrative expenses to support the expansion of 3G, growth in Vodacom s South African and other African operations and increased competition, increased payments to other network operators due to higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile networks, increased depreciation, amortisation and impairment, higher employee costs as a result of increased headcount, average 7.5% annual salary increases, an increase in the provision for bonus schemes and an increase in the provision for long term incentives for executives and increased operating leases. The increase in these operating expenses in the 2008 financial year was primarily due to the inclusion of operating expenses relating to our newly acquired subsidiaries, Multi-Links and Africa Online, and the creation of Telkom Media, all of which impacted all expense categories. Increases in other operating expenses in the 2008 financial year were primarily driven by significant increases in payments to other operators, employee expenses, depreciation, amortisation and impairments, operating leases and services rendered. The increase in fixed-line operating expenses in the 2008 financial year was primarily due to increased payments to other operators, higher employee expenses and services rendered, partially offset by lower leases and selling, general and administrative expenses. Payments to other operators increased primarily due to increased calls from our fixed-line network to mobile and international operators as result of higher call volumes from our fixed-line network to the mobile and international networks. Employee expenses increased due to higher salaries and wages as a result of average annual salary increases and higher share compensation expenses, partially offset by a reduced provision for team award and a reduction in the number of employees. Services rendered increased primarily due to increased property management costs mainly related to increased electricity usage, electricity rates and taxes, payments to consultants to explore local and international investment opportunities, higher security costs due to increases in contract prices and maintenance and monitoring of the cable alarm system and legal fees related to Telcordia. Operating leases decreased in the year ended March 31, 2008 primarily due to a discount received on the extension of our vehicle lease and a reduction in the number of vehicles from 9,694 at March 31, 2007 to 8,792 at March 31, Selling, general and administrative expenses decreased primarily due to the provision for probable liabilities in the Telcordia dispute in the 2007 financial year, which were not increased significantly in the 2008 financial year, and lower marketing expense, partially offset by the R217 million impairment of the Telkom Media loan in the 2008 financial year increased materials and maintenance expenses and higher bad debts. Depreciation, amortisation, impairments and write-offs increased in the year ended March 31, 2008 primarily as a result of higher amortisation of intangible assets and increased depreciation due to the ongoing investment in telecommunications network equipment and data processing equipment, partially offset by lower asset write-offs. The increase in fixed-line operating expenses in the 2007 financial year was primarily attributable to increased selling, general and administrative expenses, employee expenses, payments to other operators, and services rendered, partially offset by lower depreciation, amortisation, impairments and writeoffs as a result of an increase in the useful lives of certain assets. Selling, general and administrative expenses increased primarily as a result of the provision raised for possible liabilities in the Telcordia dispute, higher materials and maintenance expenses, increased marketing and sponsorships, and increased costs of sales due to the reclassification of finance leases associated with customer premises equipment in selling, general and administrative expenses, partially offset by a provision for VAT that was reversed due to a revenue ruling from SARS. Employee expenses increased due to higher salaries and wages as a result of average annual salary increases of 7.0% and related benefits, an increase in the number of employees and increased payments to part time employees and contractors. Payments to other network operators increased primarily due to higher call volumes from our fixed-line network to the mobile networks and higher payments to Telkom Annual Report

52 Financial review continued international network operators as a result of higher international outgoing volumes and a weaker exchange rate. Services rendered increase in the year ended March 31, 2007 primarily due to increased payments to consultants to explore local and international investment opportunities, customer centricity and higher security and property management costs at TFMC. Fixed-line segment operating expenses The following table shows the operating expenses of our fixedline segment broken down by expense category as a percentage of total revenue and the percentage change by operating expense category for the years indicated. Fixed-line operating expenses Year ended March 31, / 2008/ ZAR % of ZAR % of ZAR % of (in millions, except percentages) revenue revenue revenue % change % change Employee expenses (1) 6, , , Payments to other network operators 6, , , Selling, general and administrative expenses (2) (3) 2, , , (1.9) Services rendered 2, , , Operating leases (18.8) Depreciation, amortisation, impairments and write-offs 4, , , (17.9) 4.2 Fixed-line operating expenses 22, , , (1) Employee expenses include workforce reduction expenses of R3 million, R24 million and R85 million in the years ended March 31, 2008, 2007 and 2006, respectively. (2) In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to Telkom s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance charges. In the year ended March 31, 2008 we recorded a provision of R569 million for probable liabilities related to Telkom s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific sub-claims within the Telcordia claim. (3) Includes a R217 million impairment relating to Telkom Media in the 2008 financial year. 158

53 Employee expenses Employee expenses consist mainly of salaries and wages for employees, including bonuses and other incentives, benefits and workforce reduction expenses. The following table sets forth information related to our employee expenses for the years indicated. Fixed-line employee expenses Year ended March 31, / 2008/ (in millions, except percentages and number of employees) ZAR ZAR ZAR % change % change Salaries and wages 4,466 5,095 5, Benefits 2,383 2,673 2, (0.1) Workforce reduction expenses (71.8) (87.5) Employee related expenses capitalised (620) (696) (786) Employee expenses 6,314 7,096 7, Number of full-time, fixed-line employees 25,575 25,864 24, (3.8) Employee expenses increased in the year ended March 31, 2008 primarily due to higher salaries and wages as a result of average annual salary increases of 7.0%, and increased share option grant expenses as a result of the higher number of shares granted in the year, partially offset by lower team awards. Employee expenses increased in the year ended March 31, 2007 primarily due to higher salaries and wages as a result of average annual salary increases of 7.0% and related benefits, a 1.1% increase in the number of fixed-line employees and increased payments to part time employees and contractors. Salaries and wages increased in the year ended March 31, 2008 primarily due to average annual salary increases of 7.0% and was further impacted by increased payments to contractors from original equipment manufacturers. Salaries and wages increased in the year ended March 31, 2007 primarily due to average annual salary increases of 7.0% and a 1.1% increase in the number of fixed-line employees and increased payments to part time employees and contractors to meet customer centricity objectives and the deployments of next generation network objectives. Benefits include allowances, such as bonuses, company contributions to medical aid, pension and retirement funds, leave provisions, workmen s compensation and levies payable for skills development. Benefits decreased in the 2008 financial year primarily due to lower team awards, a lower provision for medical aid for pensioners as a result of the annuity policy qualifying as a plan asset in June 2006, a lower provision for leave as a result of the decrease in the number of employees and lower training expenses, partially offset by increased share option grant expenses as a result of the higher number of shares allocated during the year. Benefits increased in the 2007 financial year due to increases in salaries and wages, higher pension fund contributions resulting from the movement of employees from the pension fund to the retirement fund and the funding of the related deficit, increased post-retirement telephone benefits, increased sales commissions, increased training and increased critical skills retention. Workforce reduction expenses include the cost of voluntary early retirement, termination severance packages offered to employees and the cost of social plan expense to prepare affected employees for new careers outside Telkom. Workforce reduction expenses decreased substantially in the years ended March 31, 2008 and 2007 due to the moratorium on voluntary severance packages taken in the 2007 financial year. Workforce reduction expenses in the 2007 financial year included social planning expenses as part of Telkom s workforce reduction program. An additional four employees in the 2008 financial year, 13 employees in the 2007 financial year and 245 employees in the 2006 financial year left Telkom as part of the conclusion of Telkom s workforce reduction initiatives for the 2005 financial year. Employee related expenses capitalised include employee related expenses associated with construction and infrastructure development projects. Employee related expenses capitalised increased in the years ended March 31, 2008 and March 31, 2007 primarily due to annual salary increases and increased capital expenditures on projects during the year. Telkom Annual Report

54 Financial review continued Payments to other network operators The following table sets forth information related to our payments to other network operators for the periods indicated. Fixed-line payments to other network operators Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Payments to mobile communications network operators 5,220 5,425 5, Payments to international and other network operators 920 1,036 1, Payments to fixed-line operators 234 n/a n/a Payments to other network operators 6,140 6,461 6, Payments to fixed-line operators in the 2008 financial year were as a result of interconnection commencing with Neotel, USALS and VANS during the year. Payments to mobile and international network operators increased in the 2008 and 2007 financial years primarily due to higher call volumes from our fixed-line network to the mobile networks, resulting from discounts offered on our CellSaver and Telkom Closer products, increased fixed-to-mobile calls by business customers due to growth in the mobile market, increased international outgoing traffic arising from our reduced average international tariffs and a weaker exchange rate in the 2008 and 2007 financial years. The termination rate we pay to mobile operators and our retention have not changed in the three years ended March 31, 2008 while our international outgoing tariffs have generally decreased during this period. Payments to other network operators include payments made by our fixed-line business to Vodacom, which were R3,017 million, R2,954 million and R2,855 million in the years ended March 31, 2008, 2007 and 2006, respectively. These amounts were attributable to our interest in Vodacom and were eliminated from the Telkom Group s expenses on consolidation. Selling, general and administration expenses The following table sets forth information related to our fixed-line selling, general and administrative expenses for the periods indicated. Fixed-line selling, general and administrative expenses Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Materials and maintenance 1,608 1,900 1, Marketing (3.5) Bad debts (11.0) 58.4 Other (1) (2) 697 1,335 1, (17.4) 160 Selling, general and administrative expenses (1) 2,837 3,976 3, (1.9) (1) In the year ended March 31, 2004, all of these provisions were reversed due to a court ruling at that time. In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to Telkom s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance charges. In the year ended March 31, 2008 we increased the provision to R569 million for probable liabilities related to Telkom s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific sub-claims within the Telcordia claim. (2) Includes a R217 million impairment relating to Telkom Media in the 2008 financial year.

55 Selling, general and administrative expenses decreased primarily due to the provision for probable liabilities in the Telcordia dispute in the 2007 financial year, which were not increased significantly in the 2008 financial year, and lower marketing expense, partially offset by the R217 million impairment of the Telkom Media loan in the 2008 financial year increased materials and maintenance expenses and higher bad debts. Selling, general and administrative expenses increased in the year ended March 31, 2007 primarily due to the provision raised for probable liabilities in the Telcordia dispute, higher materials and maintenance expenses, increased marketing and sponsorships and increased costs of sales due to the reclassification of finance leases associated with customer premises equipment in selling, general and administrative expenses. Materials and maintenance expenses increased in the year ended March 31, 2008 primarily due to increased operating maintenance projects as result of an increase in the number of technologies employed in the network and higher fuel costs as a result of the increased price of fuel. Materials and maintenance expenses increased in the year ended March 31, 2007 primarily due to higher incidents of copper theft, increased operating maintenance projects and a higher number of maintenance contracts as result of new technology roll-out. Marketing expenses decreased in the year ended March 31, 2008 primarily due to lower sponsorships and decreased calling plan advertising during the year. Marketing expenses increased in the year ended March 31, 2007 primarily due to increased sponsorships, higher market research costs and increased advertising and media campaigns. We expect marketing expenses in response to increased competition, including from Neotel, and the further liberalisation of the South African communications industry generally, and the marketing of our packages will increase and sponsorships will decrease. Bad debt increased in the year ended March 31, 2008 due to provisions for higher international bad debts in certain countries, including Nigeria, Gaban and the United Kingdom. Bad debt decreased in the year ended March 31, 2007 resulting primarily from improved credit management and credit vetting policies, targeted line roll-out and an improved profiling of debtors. Bad debt as a percentage of revenue was 0.7%, 0.4% and 0.5% in the 2008, 2007 and 2006 financial years, respectively. Other expenses decreased in the year ended March 31, 2008 primarily due to the provision for probable liabilities in the Telcordia dispute in the 2007 financial year, which were not increased significantly in the 2008 financial year, partially offset by the R217 million impairment of the Telkom Media loan in the 2008 financial year. Other expenses increased in the year ended March 31, 2007 primarily due to the provision raised for probable liabilities in the Telcordia dispute and increased costs of sales due to the reclassification of finance leases associated with customer premises equipment in selling, general and administrative expenses. Services rendered The following table sets forth information relating to services rendered expenses for the periods indicated. Fixed-line services rendered Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Property management 1,109 1,141 1, Consultants, security and other 936 1,065 1, Telkom Annual Report 2008 Services rendered 2,045 2,206 2, Property management increased in the year ended March 31, 2008 primarily as a result of increased property payment costs, mainly related to increased electricity usage, electricity rates and taxes, payments to consultants to explore local and international investment opportunities, higher security costs due to increases in contract prices and maintenance and monitoring of the cable alarm system and legal fees related to Telcordia. Property management increased in the year ended March 31, 2007 primarily as a result of increased salary, wages, maintenance, rates and taxes at TFMC, which are passed through to us. Payments to consultants increased in the year ended March 31, 2007 primarily due to increased payments to consultants to explore local and international investment opportunities, customer centricity and higher security costs. Operating leases Operating leases decreased in the year ended March 31, 2008 primarily due to a discount received on the extension of our vehicle lease and a reduction in the number of vehicles from 9,694 at March 31, 2007 to 8,792 at March 31, Operating leases was relatively flat in the year ended March 31, 2007.

56 Financial review continued Fixed-line depreciation, amortisation, impairments and write-offs Year ended March 31, / 2008/ (in millions, except percentages) % change % change Depreciation of property, plant and equipment 3,789 2,993 3,061 (21.0) 2.3 Amortisation of intangibles (21.2) 34.1 Write-offs of property, plant and equipment and intangible assets (7.7) Depreciation, amortisation, impairments and write-offs 4,363 3,582 3,732 (17.9) 4.2 Depreciation, amortisation, impairments and write-offs Depreciation, amortisation, impairments and write-offs increased in the year ended March 31, 2008 primarily as a result of higher amortisation of intangible assets and increased depreciation due to the ongoing investment in telecommunications network equipment and data processing equipment, partially offset by lower asset write-offs. Depreciation, amortisation, impairments and write-offs decreased in the year ended March 31, 2007 primarily as a result of an increase in the useful life of certain assets, partially offset by ongoing investment in telecommunications network equipment and data processing equipment. Mobile operating expenses The following table shows our 50% share of Vodacom s operating expenses and the percentage change for the periods indicated. Mobile operating expenses Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Employee expense 1,019 1,186 1, Payments to other network operators 2,317 2,818 3, Selling, general and administrative expenses 7,327 8,777 10, Services rendered Operating leases Depreciation, amortisation and impairments 1,472 1,693 1, Mobile operating expenses 12,635 15,185 17, The increase in mobile operating expenses in the 2008 financial year was primarily due to inflationary factors and growth in the business, which led to increased selling, general and administrative expenses to support the expansion of 3G, growth in Vodacom s South African and African operations and increased competition, increased payments to other network operators due to higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile networks, higher employee costs as a result of increased headcount as well as increased depreciation, amortisation and impairment. The increase in mobile operating expenses in the 2007 financial year was primarily due to increased selling, general and administrative expenses to support the expansion of 3G, growth in Vodacom s South African and African operations and increased competition, increased payments to other network operators due to higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile networks, increased depreciation, amortisation and impairment, higher employee costs as a result of increased headcount, average 7.5% annual salary increases, an increase

57 in the provision for deferred bonus schemes and an increase in the provision for long term incentives for executives and increased operating leases. Employee expenses Vodacom s employee expenses increased in the year ended March 31, 2008 primarily as a result of a 9.5% increase in headcount to support the expansion of customer care operations, the strengthening of senior management structures to support the growth in ongoing operations and the launch of Vodacom Business. Annual salary increases and increased provisions for long term incentive schemes also contributed to the increase in staff expenses. Vodacom s employee expenses increased in the year ended March 31, 2007 primarily as a result of an 14.5% increase in the number of employees to support the growth in operations as well as a 7.5% average annual salary increases, an increase in the provision for deferred bonus schemes and an increase in the provision for long term incentives for executives. Total headcount in Vodacom s South African operations increased 2.6% to 4,849 employees as of March 31, 2008 and 9.8% to 4,727 employees as of March 31, 2007 from 4,305 employees as of March 31, Total headcount in Vodacom s other African countries increased 30.9% to 1,992 employees as of March 31, 2008 and 31.9% to 1,522 employees as of March 31, 2007 from 1,154 employees as of March 31, Total headcount includes temporary agency employees. Employees seconded to other African countries are included in the number of employees of other African countries and excluded from Vodacom South Africa s number of employees. Employee productivity in South Africa and other African countries, as measured by customers per employee, increased 3.0% to 4,969 customers per employee as of March 31, 2008 and 12.0% to 4,825 customers per employee as of March 31, 2007 from 4,308 customers per employee as of March 31, Payments to other network operators Payments to other network operators consist mainly of interconnection payments made by Vodacom s South African and other African operations for terminating calls on other operators networks. Vodacom s payments to other network operators increased significantly in the years ended March 31, 2008 and 2007 as a result of increased outgoing traffic in line with increased customer growth and the increasing percentage of outgoing traffic terminating on the other mobile networks rather than Telkom s fixed-line network as the cost of terminating calls on other mobile networks is higher than calls terminating on Telkom s fixed-line network. As the mobile communications market continues to grow in South Africa, Vodacom expects that interconnection charges will continue to increase and adversely impact Vodacom s profit margins. Payments to other network operators in our mobile segment included R234 million, R234 million and R232 million in the years ended March 31, 2008, 2007 and 2006, respectively, for interconnection fees paid to our fixed-line segment, which were eliminated from the Telkom Group s operating expenses on consolidation. Selling, general and administrative expenses The following table sets forth information related to our 50% share of Vodacom s selling, general and administrative expenses for the periods indicated. Mobile selling, general and administrative expenses Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Telkom Annual Report 2008 Selling, distribution and other 6,415 7,703 9, Marketing Regulatory and licence fees Bad debts (38.9) Selling, general and administrative expenses 7,327 8,777 10,

58 Financial review continued Vodacom s selling, general and administrative expenses increased in the years ended March 31, 2008 and 2007 primarily due to an increase in selling, distribution and other expenses, incentive costs, regulatory and licence fees and marketing expenses to support the launch and expansion of 3G, growth in Vodacom s South African and African operations and increased competition. Selling, distribution and other expenses include cost of goods sold, commissions, customer acquisition and retention expenses, distribution expenses and insurance. The increase in selling distribution and other expenses in the 2008 and 2007 financial years was primarily due to increased customer connections, competition, revenue, cost of equipment as a result of increased handset sales and maintenance of the GSM infrastructure and billing systems as well as due to the Vodafone global alliance fee. The increase in marketing expenses in the 2008 and 2007 financial years was mainly due to promoting new technologies, including 3G and Vodafone live!, promoting number portability in the 2007 financial year and further promoting the Vodacom brand in all operations. The increases in regulatory and licence fees during the reporting periods were directly related to the increase in operating revenues and corresponding payments under Vodacom s existing licences. The increase in bad debts in the 2008 financial year resulted from a clean-up of Smartphone debtors following the increase in shareholding to 100%. Services rendered Services rendered increased in the years ended March 31, 2008 and 2007 primarily due to higher consultancy costs relating to facility management and special projects. Operating leases The increase in Vodacom s operating leases in the years ended March 31, 2008 and 2007 was primarily due to an increase in the lease of transmission lines and other accommodation. Operating leases in our mobile segment included R514 million, R453 million and R423 million in the years ended March 31, 2008, 2007 and 2006, respectively, for operating lease payments to our fixed-line segment, which were eliminated from the Telkom Group s operating expenses on consolidation. Depreciation, amortisation and impairments Depreciation, amortisation and impairments increased in the years ended March 31, 2008 and 2007 primarily due to higher capital expenditure as a result of the implementation and expansion of 3G/HSDPA networks, the weakening of the Rand against the other functional currencies of Vodacom and the impairment of assets in Vodacom Mozambique. Amortisation of intangibles was higher in the year ended March 31, 2007 due to the business acquisitions in that financial year. Other segment operating expenses The following table shows operating expenses for our other segment broken down by major expense categories and the percentage change for the periods indicated. Other operating expenses Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change 164 Employee expense Payments to other operators ,880.0 Selling, general and administrative expenses Services rendered Operating leases (10.7) Depreciation, amortisation and impairments (2.4) Other operating expenses ,

59 Increases in other operating expenses in the 2008 financial year were primarily driven by significant increases in payments to other operators, employee expenses, depreciation, amortisation and impairments, operating leases and services rendered. The increase in these operating expenses in the 2008 financial year was primarily due to the inclusion of operating expenses relating to our newly acquired subsidiaries, Multi-Links and Africa Online, and the creation of Telkom Media, all of which impacted all expense categories. The following table shows the contributions to other operating expenses by each of the five subsidiaries contained in our other segment and the percentage change for the periods indicated. Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change TDS Directory Operations Multi-Links 942 n/a n/a Africa Online n/a 1,375.0 Swiftnet Telkom Media 151 n/a n/a Other operating expenses , Multi-Links and Africa Online were the main contributors to the significant increase in payments to other operators in the 2008 financial year, with R624 million payments made by Multi-Links and R141 million payments made by Africa Online to enable their respective networks in the nine countries of operation to supply data transmission services, managed data networking services and Internet access and related information technology services in these newly acquired markets. Employee expenses Employee expenses increased by 96.5% in the 2008 financial year due to a significant investment in workforce during the 2008 financial year. Employee expenses of R88 million in Telkom Media, R39 million by Multi-Links and R28 million by Africa Online were required to attract and develop the necessary skilled workforce in each of these new operating environments. Selling, general and administration expenses The 58.3% increase in selling, general and administrative expenditure in the 2008 financial year primarily related to R141 million spent at Multi-Links, mainly on materials and maintenance to enable the further development and maintenance of its CDMA network in order to achieve subscriber growth and network reliability. Depreciation, amortisation, impairments and write-offs The increased investment in property, plant and equipment by Multi-Links in Nigeria and Kenya to establish a new main network site in Gbagada, Lagos, enhance the switching capacity in Lagos, expand base stations and towers, and to extend fiber deployment, resulted in a significant increase in depreciation, amortisation and impairments in this segment in the 2008 financial year. The increase primarily related to R86 million depreciation cost in Multi- Links and R12 million from Africa Online. Services rendered and operating leases The increases in services rendered and operating leases were also directly related to our newly acquired subsidiaries, Multi- Links, Africa Online and Telkom Media, that were not previously included in the Telkom Group results. Group investment income Investment income consists of interest received on short term investments and bank accounts and income received from our investments. Investment income decreased 16.2% to R197 million in the 2008 financial year and decreased 40.8% to R235 million in the 2007 financial year from R397 million in the 2006 financial year. The decrease in the 2008 financial year was primarily due to lower interest received from fixed deposits and repurchase agreements mainly due to lower cash balances. The decrease in the 2007 financial year was primarily due to lower interest received as a result of lower cash balances available for short term investments and increased taxation payments. Group finance charges Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances. Telkom Annual Report

60 Financial review continued The following table sets forth information related to our finance charges for the periods indicated. Finance charges Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Interest expense 1,346 1,327 1,885 (1.4) 42.1 Local loans 1,506 1,488 2,041 (1.2) 37.2 Foreign loans 9 19 n/a Finance charges capitalised (169) (161) (175) (4.7) 8.7 Foreign exchange (gains) losses and fair value movements (123) (202) (82) (64.2) 59.4 Fair value (adjustments) on derivative instruments (170) (448) (196) (163.5) 56.3 Foreign exchange losses (53.7) Total finance charges 1,223 1,125 1,803 (8.0) 60.3 During the year ended March 31, 2008, finance charges increased primarily due to a higher interest expense resulting from higher debt levels in the fixed-line, mobile and other segments, and foreign exchange losses and fair value movements decreased primarily due to currency movements and fair value losses on the put option we have in place relating to Multi-Links and Vodacom Congo. This was partially offset by fair value adjustments as a result of the significant weakness of the Rand against international currencies. During the year ended March 31, 2007, finance charges decreased due to a slightly reduced interest expense resulting from lower interest bearing debt levels, and an increase in the net fair value and exchange gains due to currency movements and fair value adjustments of our consolidated special purpose entity used to fund Telkom s post retirement medical benefit obligation. Taxation Our consolidated tax expense decreased 0.6% to R4,704 million in the year ended March 31, 2008 and increased 4.6% to R4,731 million in the year ended March 31, 2007 from R4,523 million in the year ended March 31, The decrease in the 2008 financial year was primarily due to higher non-deductable expenses relating mostly to the impairment of Telkom Media and Africa Online assets, the increase in STC tax credits utilised in respect of the repurchase of Telkom Shares, the utilisation of the Multi-Links assessed losses and the impact of the tax rate change on deferred taxation from 29% to 28% with effect from April 1, The increase in the 2007 financial year was mainly due to the higher capital gains tax liability created and higher non-deductable expenses in Telkom company and Vodacom. 166

61 The following table sets forth information related to our effective tax rate for the Telkom Group, Telkom Company and Vodacom for the periods indicated: Year ended March 31, / 2008/ % % % % change % change Effective tax rate Telkom Group Telkom Company (3.2) 1.7 Vodacom (1.6) (7.6) The increase in the Telkom Group effective tax rate in the 2008 financial year was mainly due to higher non-deductible expenses relating mostly to the impairment of Telkom Media and Africa Online assets, the increase in STC tax credits utilised in respect of the repurchases of Telkom shares and the impact of the tax rate change on deferred taxation from 29% to 28% with effect from April 1, The increase in the Telkom Group effective tax rate in the 2007 financial year was mainly due to higher capital gains tax and higher non-deductable expenses in Telkom company and Vodacom. The higher effective tax rate for Telkom Company in the year ended March 31, 2008 was primarily due to higher nondeductable expenses relating to the R217 million impairment of the Telkom Media loan and an increase of R198 million in secondary tax on companies, partially offset by higher exempt income resulting from dividends received from Vodacom and other subsidiaries. The lower effective tax rate for Telkom Company in the year ended March 31, 2007 was primarily due to higher exempt income resulting mainly from dividends received primarily from Vodacom partially offset by higher nondeductable expenses relating to the Telcordia dispute. Vodacom s effective tax rate decreased in the 2008 financial year primarily due to the decrease in the rate of secondary tax on companies from 12.5% to 10%. The lower effective tax rate for Vodacom in the 2007 financial year was mainly due to the utilisation of the Vodacom Congo s capital expenditure allowances. Profit for the year and earnings per share Profit for the year attributable to the equity holders of the Group decreased by 7.8% to R7,975 million (March 31, 2007: R8,646 million) for the year ended March 31, Profit for the year attributable to equity holders of Telkom decreased in the 2008 financial year primarily due to decreased operating profit in our fixed-line and other segments, partially offset by increased operating profit in our mobile segment. Higher finance charges and lower investment income were partially offset by lower taxation. Profit for the year attributable to equity holders of Telkom decreased in the 2007 financial year primarily due to decreased operating profit in our fixed-line segment, partially offset by increased operating profit in our mobile segment. Lower investment income and higher taxation was partially offset by an increase in net fair value and exchange gains. Group basic earnings per share decreased 6.9% to 1,565.0 cents (March 31, 2007: 1,681.0 cents) and Group headline earnings per share decreased 4.4% to 1,634.8 cents (March 31, 2007: 1,710.7 cents). Operating performance across the Group has seen the balance sheet retain its strength with net debt, after financial assets and liabilities, increasing 65.7% to R16,617 million (March 31, 2007: R10,026 million) as at March 31, 2008, resulting in a net debt to equity of 49.9% from 31.3% at March 31, On March 31, 2008, the Group had cash balances of R1,134 million (March 31, 2007: R749 million). During the year ended March 31, 2008, 12.1 million shares were repurchased for R1.65 billion, to be cancelled from the issued share capital by the Registrar of Companies. As at March 31, 2008, 4,444,138 of these shares have not yet been cancelled. Interest-bearing debt, including credit facilities utilised, increased 58.0% to R17,075 million (March 31, 2007: R10,805 million) in the year ended March 31, The Group raised commercial paper bills with a nominal value of R18,806 million for the year ended March 31, 2008 of which R15,773 million was redeemed by March 31, Credit facilities from our subsidiaries increased by R901 million, and Telkom s portion of Vodacom s interest bearing debt increased by R490 million. Telkom Annual Report

62 Financial review continued (in millions) Interest Outstanding payment Interest as of March 31, dates rate (%) 2008 ZAR TELKOM Bonds 10% statutorily guaranteed local bond due not later than March 31, March 31, 2008 (TK01) (1)(2)(3) September % unsecured local bond due February 24, 2020 (TL20) (1)(4) February ,283 Zero coupon unsecured loan stock due September 30, 2010 (PP02) (5) 304 Zero coupon unsecured loan stock due June 15, 2010 (PP03) (6) 977 Finance leases n/a 13% 38% 856 Commercial paper 4,202 Zero coupon unsecured commercial paper bills with a maturity not later than April 2, The average discount rate on these commercial paper bills is 11.71% per annum. Call Borrowings Various ,600 Term Loans Various ,000 Bank facilities R459 million unsecured overdraft facility with ABSA Bank Limited, repayable on demand and a R1 billion unsecured committed facility, repayable on 364 days notice Mutually agreed Not utilised R1 billion unsecured committed overdraft facility with The Standard Bank of South Africa Limited, repayable with 365 days of drawdown Mutually agreed Not utilised R500 million unsecured overdraft facility with FirstRand Bank Limited, repayable on demand Mutually agreed Not utilised R150 million unsecured overdraft facility with Commerzbank AG, repayable on demand Mutually agreed Not utilised USD35 million unsecured short-term loan facility with Calyon Corporate and Investment bank, repayable on demand 168

63 Nominal outstanding Maturing as of March 31, Year ended March 31, After 2013 ZAR ZAR ZAR ZAR ZAR ZAR ZAR 2,500 2, ,350 1, ,383 3, ,600 2,600 3,000 3,000 Not utilised Not utilised Not utilised Not utilised Telkom Annual Report

64 Financial review continued (in millions) Outstanding Interest as of March 31, rate (%) 2008 ZAR R1 billion uncommitted/short-term facility with Sumitomo Mitsui Banking Corporation Mutually agreed Not utilised R500 million call loan facility with inkotha Investments Ltd. Repayable on demand. Mutually agreed Not utilised R1 billion loan agreement with Old Mutual Specialised finance (Pty) Ltd. Repayable on demand Mutually agreed Not utilised Various bank loans (3) Various 141 Bank overdraft and other short-term debt 41 Total Telkom 13,404 Vodacom (7) USD18.4 million shareholders Loan with Mirambo Limited (8) LIBOR + 5% 72 USD180 million term loan to Vodacom International Limited LIBOR +0.35% R1 billion subscription agreement with Asset JIBAR+0.78% to Backed Arbitage Securities (Pty) Ltd JIBAR +0.82% 500 USD37.0 million preference shares by Vodacom Congo(R.D.C) s.p.r.l. (9) 4.0% 150 USD1 million short-term facility by Vodacom Congo (R.D.C) s.p.r.l. 18.0% 4 R6.0 million of the shareholder loan with Number Portability Company (Proprietary) Limited Prime 3 Various finance leases (10) 12.1% to 16.9% 308 Various other short-term loans 8% 47 Bank overdrafts and other short-term debt 1,298 Total Vodacom (7) 3,113 TDS Directory Operations Various finance leases (10) Various 3 Telkom Media Various loans 8 Multi-Links USD14 million from Zenith Bank LIBOR +3.5% 45 Naira 1,500 million FCMB loan 13% 87 USD17 million ECA funding LIBOR + 2.5% 82 USD42 million ECA Huawei VFF funding LIBOR + 2% 319 Africa Online Various loans 12 Bank overdrafts and other short term debt 2 Total other 558 Grand total 17,075 Notes: (1) Listed on the Bond Exchange of South Africa. (2) Open ended bond issue, and number of bonds issued varies from time to time. The bonds matured on March 31, (3) R141 million of Telkom s indebtedness outstanding as of March 31, 2008 was guaranteed by the Government of the Republic of South Africa. (4) 2,500 of these bonds were issued on February 22, 2000 at a yield to maturity of 15.00%. The TL20 bond was listed on the Bond Exchange of South Africa with effect from April 1, (5) Issued on February 25, Original amount issued was R430 million. The yield to maturity of this instrument issued by Telkom is 14.37%. (6) Issued on June 15, Original amount issued was R1,350 million. The yield to maturity of this instrument is %. (7) Represents Telkom s 50% share of Vodacom s indebtedness. (8) Repayable on approval of at least 60% of the shareholders of Vodacom Tanzania Limited. (9) The preference shares are redeemable, but only after the first three years from date of issuance, and only on the basis that the shareholders are repaid simultaneously and in proportion to their shareholding. (10) Secured by land and buildings.

65 Nominal outstanding Maturing as of March 31, Year ended March 31, After 2013 ZAR ZAR ZAR ZAR ZAR ZAR ZAR ,301 6,150 3,911 1, , ,298 1,298 3,113 1, Telkom Annual Report ,972 7,753 4,795 2, ,

66 Financial review continued Group capital expenditure The following table shows the Telkom Group s investments in property, plant and equipment including intangible assets, including our 50% share of Vodacom s investments, for the periods indicated. Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Group capital expenditure Fixed-line 4,900 6,594 6, Baseline 2,128 3,409 4, Revenue generating (57.5) (64.2) Network evolution , Sustainment (30.2) (33.4) Effectiveness and efficiencies 1,080 1, (26.3) Company support (9.3) Regulatory ,005.9 (80.3) Mobile 2,571 3,608 3, (4.1) Other , ,640.9 Total investment in property, plant and equipment and intangible assets 7,506 10,246 11, Fixed-line capital expenditure, which include spending on intangible assets, increased 3.0% to R6,794 million in the 2008 financial year from R6,594 million in the 2007 financial year and represented 20.9% of fixed-line revenue compared to 20.4% in the 2007 financial year. The increase in baseline and revenue generating capital expenditure to R4,095 million in the 2008 financial year from R3,568 million in the 2007 financial year was largely for the deployment of technologies to support the growing data services business, including ADSL footprint, links to the mobile cellular operators and expenditure for access line deployment in selected high growth residential areas. The continued focus on rehabilitating the access network and increasing the efficiencies in the transport network contributed to the network evolution and sustainment capital expenditure increasing to R1,369 million in the 2008 financial year from R1,200 million in the 2007 financial year. Telkom continues to focus on its operations support system investment with current emphasis on workforce management, provisioning and fulfilment, assurance and customer care hardware technology upgrades on the billing platform and performance and service management. During the year ended March 31, 2008, R841 million was spent on the implementation of systems compared to R1,141 million in the 2007 financial year. Mobile capital expenditure (50% of Vodacom s capital expenditure) decreased by 4.1% to R3,460 million in the 2008 financial year from R3,608 million in the 2007 financial year and represents 14.4% of mobile revenue compared to 17.5% in the 2007 financial year which was mainly spent in the cellular network infrastructure consisting of radio, switching and transmission network infrastructure and computer software. The decrease in capital expenditure in other African countries was largely as a result of decreased investment in Tanzania, Democratic Republic of the Congo and Mozambique offset by an increase in investment in Lesotho. Our capital expenditure of R6,594 million on fixed-line capital expenditure in the year ended March 31, 2007 was higher than the budgeted fixed-line capital expenditure for the 2007 financial year of R6.5 billion largely due to investment in broadband services and an unfavourable exchange rate. The 34.6% increase in fixed-line capital expenditure in the 2007 financial year was primarily due to higher expenditure for business and residential broadband services, wholesale services to the mobile cellular operators, access line deployment in selected high growth residential areas, technologies to support the continued growth in our data services business, the ongoing rehabilitation of our access network and increasing the efficiencies

67 and redundancies in our transport network in line with our planned migration to an Internet Protocol next generation network. The 40.3% increase in mobile capital expenditure in the 2007 financial year reflects the increased investment in South Africa and other African countries in network infrastructure due primarily to the increased customer base and higher traffic and to further support 3G technologies. Our consolidated capital expenditures in property, plant and equipment for the 2009 financial year is budgeted to be approximately R15.2 billion, of which approximately R7.0 billion is budgeted to be spent in our fixed-line segment, and approximately R5.2 billion is budgeted to be spent in our mobile segment, which is our 50% share of Vodacom s budgeted capital expenditure of approximately R10.4 billion, and approximately R3.0 billion is budgeted to be spent in our other segment. Our capital expenditures are continuously examined and evaluated against the perceived economic benefit and may be revised in light of changing business conditions, regulatory requirements, investment opportunities and other business factors. Group cash flow The following table shows information regarding our consolidated cash flows for the periods indicated. Year ended March 31, / 2008/ (in millions, except percentages) ZAR ZAR ZAR % change % change Cash flows from operating activities 9,506 9,356 10,603 (1.6) 13.3 Cash flows from investing activities (7,286) (10,412) (14,106) Cash flows from financing activities (258) (2,920) 2, Net (decrease)/increase in cash and cash equivalents 1,962 (3,976) (560) (302.7) 85.9 Effect of foreign exchange rate differences (8) (462.5) 51.7 Net cash and cash equivalents at the beginning of the year 2,301 4, (92.8) Net cash and cash equivalents at the end of the year 4, (208) (92.8) (167.5) Cash flows from operating activities Our primary sources of liquidity are cash flows from operating activities and borrowings. We intend to fund our expenses, indebtedness and working capital requirements from cash generated from our operations and from capital raised in the markets. The increase in cash flows from operating activities in the 2008 financial year is mainly due to lower taxation payments as well as an increase in cash generated from operations, partially offset by higher dividends paid. The decrease in cash flows from operating activities in the 2007 financial year is mainly due to higher taxation payments, partially offset by the increase in cash generated from operations. Cash flows from investing activities Cash flows from investing activities relate primarily to investments in our fixed-line network, our other segment s networks and our 50% share of Vodacom s investments in its mobile networks in South Africa and other African countries. The increase in cash flows used in investing activities in the 2008 financial year was mainly the result of R1, 985 million cash utilised for the purchase of Multi-Links and increased equity investments in Smartphone, increased capital expenditures in our fixed-line, mobile and other segments and lower proceeds on the disposal of investments, partially offset by higher proceeds on the disposal of property, plant and equipment and intangibles. The increase in cash flows used in investing activities in the 2007 financial year was mainly the result of increased capital expenditure in both the fixed-line and mobile segments and acquisitions of subsidiaries and reduced disposals and additions to investments. Telkom Annual Report

68 Financial review continued 174 Cash flows from financing activities Cash flows from financing activities are primarily a function of borrowing and share buy back activities. In the 2008 financial years, loans raised and the decrease in net financial assets exceeded loans repaid, shares bought back and cancelled and finance lease obligation repaid. In the 2008 financial year, cash flows from financing activities was primarily due to the issuance of R18,806 million nominal value of commercial paper bills, as well as entering into call and term loans of R5,600 million to fund the redemption of the TK01 bond and other cash flows from investing activities, including R1.6 billion of additional bank borrowings and interest bearing debt by Vodacom. This was partially offset by the maturing commercial paper debt of R15, 773 million nominal value, the repayment of the TK01 bond with a nominal value of R4,680 million and R1,647 million paid for the repurchase of shares during the year. In the 2007 financial year, loans and finance leases repaid and shares repurchased and cancelled exceeded loans raised and the decrease in net financial assets, by R2,920 million. In the 2007 financial year cash flows used in financing activities increased primarily due to the lower sale of repurchase agreements and derivative instruments that were sold in the 2006 financial year to fund dividends and tax payments. On October 31, 2006, we repaid the TL06 local bond having a nominal value of R2,100 million and during the 2007 financial year, we repaid R3,731 million in nominal value of commercial paper bill debt. Commercial paper bills having a nominal value of R4,651 million were issued in the 2007 financial year. In the 2006 financial year, loans and finance lease repaid and shares repurchased and cancelled exceeded loans raised and the decrease in financial assets by R258 million. On April 11, 2005, we repaid Euro 500 million of our 7.125% unsecured Euro bond that was issued on April 12, 2000 by issuing commercial paper bills ranging in maturities from one month to one year, with yields of between 7.00% and 7.51% and by issuing a further R600 million 10.5% unsecured local bond (TL06) due October 31, 2006 at a yield to maturity of 8.18%. In addition, we repaid a net of R2,720 million of commercial paper bills and utilised R1,502 million for the share buy-back. Cash inflows from maturing financial assets amounted to R4,544 million in the 2006 financial year. Working capital We had negative consolidated working capital of approximately R9.3 billion as of March 31, 2008, compared to negative consolidated working capital of approximately R8.2 billion as of March 31, 2007 and approximately R3.0 billion as of March 31, 2006 and Vodacom had negative working capital of approximately R7.9 billion as of March 31, 2008, compared to negative working capital of approximately R7.4 billion as of March 31, 2007 and approximately R5.2 billion as of March 31, Negative working capital arises when current liabilities are greater than current assets. The increase in negative working capital in the 2008 financial year was primarily due to an increase in the current portion of interest bearing debt due to the repayment of the TK01 local bond with a short term debt that was subsequently partially refinanced by the TL12 and TL15 bonds after year end, a reduction in cash available due to acquisition activities, increased capital expenditure, increased dividends paid, shares repurchased and an increase in trade and other payables. The increase in negative working capital in the 2007 financial year was primarily due to a reduction in cash used to pay dividends, tax and capital expenditures and an increase in the current portion of interest bearing debt, as a result of the TK01 local bond becoming due on March 31, Telkom is of the opinion that the Telkom Group s cash flows from operations, together with proceeds from liquidity available under credit facilities and in the capital markets, will be sufficient to meet the Telkom Group s present working capital requirements for the twelve months following the date of this annual report. We intend to fund current liabilities through a combination of operating cash flows and with new borrowings and borrowings available under existing credit facilities. We had R7.6 billion available under existing credit facilities as of March 31, Legal proceedings Telcordia Telcordia instituted arbitration proceedings against Telkom in March 2001 before a single arbitrator of the International Court of Arbitration, operating under the auspices of the International Chamber of Commerce. Telcordia is seeking to recover approximately USD130 million for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year which was increased by Telcordia to USD172 million in the 2007 financial year and subsequently decreased to USD128 million. The arbitration proceeding relates to the cancellation of an agreement entered into between Telkom and Telcordia during

69 June 1999 for the development and supply of an integrated endto-end customer assurance and activation system by Telcordia. In September 2002, the arbitrator found that Telkom had wrongfully repudiated the contract and a partial award was issued by the arbitrator in favor of Telcordia. Telkom subsequently filed an application in the South African High Court to review and set aside the partial award. On November 27, 2003, the South African High Court set aside the partial award and issued a cost order in favor of Telkom. On May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to appeal and ordered Telcordia to pay the legal costs of Telkom. On November 29, 2004 the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia filed a notice of appeal and also petitioned the United States District Court for the District of Columbia to confirm the partial award, which petition was dismissed, along with a subsequent appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District Court of New Jersey. The United States District Court of New Jersey also dismissed Telcordia s petition, reaffirming the decision of the United States District Court of Columbia. Telcordia appealed this dismissal, which was later dismissed by the Appeals Court of New Jersey. The appeal by Telcordia in the Supreme Court of Appeals was set down for and heard on October 30 and October 31, Following the successful upholding of the appeal, Telkom filed an application for leave to appeal to the Constitutional Court on only the issue revolving around the Supreme Court of Appeals failure to recognise Telkom s rights of access to the courts under the South African Arbitration Act. The Constitutional Court has since dismissed Telkom s appeal with costs. The Constitutional Court judgment brought to finality the dispute over the merits of Telcordia s claim against Telkom and the parties reconvened the arbitration in May 2007 to deal with the amount of damages to which Telcordia is entitled. Two hearings were held at the International Dispute Resolutions Centre, or IDRC. The first hearing was held in London on May 21, 2007 and was a directions hearing, in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the damages hearing. The second hearing was held in London at the IDRC on June 25 and 26, 2007 and dealt with the application by Telcordia for the striking out of part of Telkom s defence on the basis that Telkom had raised issues in its defence that had already been heard by the arbitrator prior to his partial award. This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide certain particulars requested by Telkom with regard to the claims by Telcordia. In his ruling, the arbitrator also set out a list of issues for determination of the damages. The mediation took place in London in February and April of 2008 without success. In the interim the parties have agreed to the appointment by the arbitrator of a third party expert to deal with the technical issues in relation with the software that was required to be provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. The arbitration is expected to continue later in Although Telkom is currently unable to predict the exact amount that it may eventually be required to pay Telcordia, it has made provisions for estimated liabilities in respect of the Telcordia claim in the sum of USD70 million (R569 million), including interest and legal fees. Telkom will be required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount of any damages above Telkom s provision would increase Telkom s liabilities and decrease its net profit, which could have a material adverse effect on its financial condition, cash flows and results of operations. Competition Commission We are parties to a number of legal and arbitration proceedings filed by parties with the South African Competition Commission alleging anti-competitive practices described below. If Telkom were found to have committed prohibited practices as contained in the Competition Act, 1998, as amended, Telkom could be required to cease these practices, divest these businesses and be fined a penalty of up to 10% of Telkom s annual turnover, excluding the turnover of subsidiaries and joint ventures, for each complaint for the financial years prior to the dates of the complaints. The Competition Commission has to date not imposed the maximum penalty on any offender. As competition continues to increase, we expect that we will become involved in an increasing number of disputes regarding the legality of services and products provided by us and third parties. These disputes may range from court lawsuits to complaints lodged by or against us with various regulatory bodies. We are currently unable to predict the amount that we Telkom Annual Report

70 Financial review continued 176 may eventually be required to pay in these proceedings, however, we have not included provisions for any of these claims in our financial statements. In addition, we may need to spend substantial amounts defending or prosecuting these claims even if we are ultimately successful. If Telkom is required to cease these practices, divest itself of the relevant businesses or pay significant fines, Telkom s business and financial condition could be materially adversely affected and its revenue and net profit could decline. We may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause our indebtedness to increase. Independent Cellular Service Provider Association of South Africa (ICSPA) In 2002, the ICSPA filed a complaint against Telkom at the Competition Commission in terms of the Competition Act, alleging that Telkom had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the premicell device installed by their members. ICSPA alleged various contraventions of the Competition Act. Telkom provided the Competition Commission with certain information requested. Telkom also referred the Competition Commission to its High Court application in respect of utilisation of the premicell device. The Competition Commission declined to refer the matter to the Competition Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, Telkom filed its answering affidavit on November 28, ICSPA has taken no further action since then. The South African Value Added Network Services (SAVA) On May 7, 2002, the South African Value Added Network Services Providers Association, an association of VANS providers, filed complaints against Telkom at the Competition Commission of the Republic of South Africa under the South African Competition Act, 89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in contravention of the Competition Act, 89 of 1998, and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of Telkom s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal for adjudication. The referred complaints deal with Telkom s alleged refusal to provide telecommunications facilities to certain VANS providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with certain VANS providers. Telkom brought an application for review against the Competition Commission and the Competition Tribunal in the South African High Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. Telkom is of the view that the Competition Tribunal does not have jurisdiction to adjudicate these matters and argues that ICASA has the requisite jurisdiction. In the review application Telkom also sought to set aside the decision by the Competition Commission to refer the complaints to the Competition Tribunal on the basis that the Competition Commission was biased, that the referral was out of time and that the Competition Commission had not adhered to the memorandum of understanding between it and ICASA. Only the Competition Commission opposed the application and filed an answering affidavit. The main complaint at the Competition Commission was held over pending the outcome of the review application. The application for review was heard on April 24 and 25, The South African High Court Judge set aside the decision of the Competition Commission to refer the SAVA complaints and the Omnilink complaint against Telkom discussed below to the Competition Tribunal. The decision was made based on three grounds, namely that: The Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the Competition Commission and ICASA; The referral was out of time, on the basis that the agreements with the complainants to extend the time in which the Competition Commission was allowed to investigate the complaints were invalid; and The Competition Commission s reliance on a report by the Link Centre created a reasonable apprehension of bias, since some of the complainants contribute financially to the Link Centre and the Link Centre s advisory board includes employees of the complainants in the SAVA complaints.

71 The Judge did not make a decision on the question of jurisdiction (i.e., whether ICASA or the Competition Tribunal has the jurisdiction to deal with competition matters in the electronic communications industry). To date, the Competition Commission has not appealed the South African High Court ruling. Omnilink On August 22, 2002 Omnilink filed a complaint against Telkom at the Competition Commission alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom IVPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter discussed above and formed part of the application to the South African High Court by Telkom to set aside the decision by the Competition Commission to refer this complaint to the Competition Tribunal. Orion/Telkom (Standard Bank and Edcon) In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the Competition Commission concerning Telkom s discounts offered on public switched telecommunication services to corporate customers. In terms of the rules of the Competition Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion simultaneously with the filing of the complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and restraining Telkom from offering Orion s corporate customers reduced rates associated with Telkom s Cellsaver discount plan. The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the main complaint before the Competition Tribunal. To date there has been no further developments on this matter. Internet Service Association (ISPA) In December 2005, the ISPA, an association of ISPs, filed complaints against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. The complaints deal with the cost of access to SAIX, the prices offered by TelkomInternet, the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects of the complaint. Telkom provided the Competition Commission with the information and is awaiting the Commission s response. M-Web and Internet Solutions (IS) On June 29, 2005, M-Web and Internet Solutions, or IS, jointly lodged a complaint with the Competition Commission against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with Telkom s pricing for ADSL retail products and its IP Connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of SAIX bandwidth for ADSL users of other Internet service providers, the architecture of Telkom s ADSL access route and the manner in which Internet service providers can only connect to Telkom s edge service router via IP Connect as well as alleged excessive pricing for bandwidth on Telkom s international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic generated by ADSL customers of M-Web as traffic destined for the peering link and that Telkom upgrade its peering link to accommodate the increased ADSL traffic emanating from M-Web and maintain a maximum of 65% utilisation. Telkom filed its answering affidavit, and is awaiting IS and M-Web s replying affidavit. Since then, Telkom has entered into a new peering agreement with IS and has responded to numerous documentation and information requests from the Competition Commission. To date there has been no further developments on this matter, either in the filing of a replying affidavit by IS/M Web in the interim relief application or in the investigation of the matter by the Competition Commission. Telkom Annual Report

72 Financial review continued M-Web On June 5, 2007, M-Web brought an application against Telkom for interim relief at the Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL Internet connections. M-Web requested the Competition Tribunal to grant an order of interim relief against Telkom to charge M-Web a wholesale price for the provision of ADSL Internet connections which is not higher than the lowest retail price. M-Web further applied for an order that Telkom implement the migration of end customers from Telkom PSTS ADSL access to M-Web without interruption of the service. Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to plead over as to the merits of the matter. Telkom also filed an application in the Transvaal Provincial Division of the South African High Court on July 3, 2007 for an order declaring that the Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by M-Web. The application before the High Court was set down for hearing during the first quarter of the 2009 financial year. The parties however entered into settlement negotiations, which resulted in the withdrawal of the interim relief application at the Competition Tribunal by M-Web as well as a withdrawal of the jurisdictional challenge filed at the South African High Court by Telkom. The parties are in further negotiations. We are not currently able to predict when these disputes may be resolved or the amount that we may eventually be required to pay, however, we have not included provisions for all of these claims in our consolidated financial statements. In addition, we may need to spend substantial amounts defending or prosecuting these claims even if we are ultimately successful. If we were to lose these or future legal and arbitration proceedings, we could be prohibited from engaging in certain business activities and could be required to pay substantial penalties and damages, which could cause our revenue and net profit to decline and have a material adverse impact on our business and financial condition. We may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause our indebtedness to increase. 178 We are parties to various additional proceedings and lawsuits in the ordinary course of our business, which our management does not believe will have a material adverse impact on us.

73 Growing shareholder returns remains our focus Consolidated financial statements 179 Company financial statements 283 Supplementary information 353 Annual financial statements Annual financial statements

74 CONSOLIDATED FINANCIAL STATEMENTS COMPANY FINANCIAL STATEMENTS Directors responsibility statement 181 Certificate from Group Company Secretary 181 Reports of independent auditors 182 Directors report 184 Consolidated income statement 186 Consolidated balance sheet 187 Consolidated statement of changes in equity 188 Consolidated cash flow statement 189 Notes to the consolidated annual financial statements 190 Company income statement 284 Company balance sheet 285 Company statement of changes in equity 286 Company cash flow statement 287 Notes to the Company annual financial statements

75 Directors responsibility statement The directors are responsible for the preparation of the annual financial statements of the Company and the Group. The directors are also responsible for maintaining a sound system of internal control to safeguard shareholders investments and the Group s assets. In presenting the accompanying financial statements, International Financial Reporting Standards with appropriate reconciliations to accounting principles generally accepted in the United States of America have been followed and applicable accounting policies have been used incorporating prudent judgements and estimates. The external auditors are responsible for independently auditing and reporting on the annual financial statements. In order for the directors to discharge their responsibilities, management continues to develop and maintain a system of internal control aimed at reducing the risk of error or loss in a cost-effective manner. The internal controls include a risk-based system of internal auditing and administrative controls designed to provide reasonable but not absolute assurance that assets are safeguarded and that transactions are executed and recorded in accordance with generally accepted business practices and the Group s policies and procedures. The directors, primarily through the Audit and Risk Management Committee, which consists of non-executive directors, meet periodically with the external and internal auditors, as well as executive management to evaluate matters concerning accounting policies, internal controls, auditing and financial reporting. The directors are of the opinion, based on the information and explanations given by management and internal audit that the internal accounting controls are adequate, so that the financial records may be relied on for preparing the financial statements and maintaining accountability for assets and liabilities. The directors are satisfied that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, Telkom SA Limited continues to adopt the going concern basis in preparing the annual financial statements. Against this background, the directors of the Company accept responsibility for the annual financial statements, which were approved by the Board of Directors on July 11, 2008 and are signed on their behalf by: Shirley Lue Arnold Chairman Reuben September Chief Executive Officer Deon Fredericks Acting Chief Financial Officer Pretoria July 11, 2008 Certificate from Group Company Secretary Telkom Annual Report Secretary to the Company is Ms SF Linford who joined Telkom as Group Company Secretary with effect from June 1, Details of the secretary s business address and the Company s registered office are set out on the ibc page in the administration section and page 109. Company Secretary Pretoria July 11, 2008

76 Ernst & Young Inc. Wanderers Office Park 52 Corlett Drive, Illovo Private Bag X14 Northlands 2116 Tel: (0) Fax: (0) Docex 123 Randburg Website Co. Reg. No. 2005/002308/21 Report of the Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Telkom SA Limited We have audited the accompanying consolidated balance sheets of Telkom SA Limited ( Telkom ) and its subsidiaries (together the Group ) as of March 31, 2008, 2007 and 2006, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended set out on pages 186 to 281. These financial statements are the responsibility of the Group s directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Vodacom Group (Proprietary) Limited, a 50% joint venture proportionally consolidated, which statements reflect total assets constituting 24%, 24% and 22% at March 31, 2008, 2007 and 2006, respectively, and total revenues constituting 43%, 40% and 36% for the years ended March 31, 2008, 2007 and 2006, respectively of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Vodacom Group (Proprietary) Limited, is based solely on the report of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits, and the report of the other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telkom SA Limited and its subsidiaries at March 31, 2008, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with International Financial Reporting Standards. As described in Note 2 to the consolidated annual financial statements, in 2008 the Group adopted new and amended accounting standards, IAS 1 Presentation of Financial Statements (Revised) and IFRS 7 Financial Instruments: Disclosures We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Telkom SA Limited s internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated July 11, 2008 expressed an unqualified opinion thereon. 182 Ernst & Young Inc. Pretoria Republic of South Africa July 11, 2008

77 Ernst & Young Inc. Wanderers Office Park 52 Corlett Drive, Illovo Private Bag X14 Northlands 2116 Tel: (0) Fax: (0) Docex 123 Randburg Website Co. Reg. No. 2005/002308/21 Independent Auditor s report To the Board of Directors and Shareholders of Telkom SA Limited Report on the Financial Statements We have audited the accompanying Group and Company annual financial statements of Telkom SA Limited, which comprise, the balance sheet as at March 31, 2008, the income statement, statement of changes in equity and cash flow statement for the year then ended, a summary of significant accounting policies and other explanatory notes, as set out on pages 184 to 281 and 284 to 351. Directors Responsibility for the Financial Statements The company s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act of South Africa. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the Group and Company financial statements present fairly, in all material respects, the financial position of the company as of March 31, 2008, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act of South Africa. Telkom Annual Report Ernst & Young Inc. Pretoria Republic of South Africa July 11, 2008

78 Directors report 184 To the members of Telkom SA Limited The directors have pleasure in submitting the annual financial statements of the Company and the Group for the year ended March 31, Nature of business Telkom is an integrated communications group with fixed and mobile services in South Africa and other African countries. Until December 9, 2005 when Neotel was issued a license, Telkom was the only fixed-line operator in South Africa. Telkom is also a leading provider of mobile services through its 50% shareholding in Vodacom Group (Pty) Limited. Financial results Earnings attributable to equity holders of Telkom for the year ended March 31, 2008 were R7,975 million (2007: R8,646 million) representing basic earnings per share of 1,565.0 cents (2007: 1,681.0 cents). Full details of the financial position and results of the Group are set out in the accompanying Company and Group financial statements. Dividends The following dividend was declared in respect of the year ended March 31, 2008: ordinary dividend number 13 of 660 per share (2007:600 cents). It remains policy to declare dividends annually at the time of announcing the Group s results each year. The objective of the Board is to progressively increase ordinary dividend payments. The level of dividend will be based upon a number of factors, including the assessment of financial results, the Group s debt level, interest coverage and future expectations, including internal cash flows. Subsidiaries, associates, other investments and joint ventures Particulars of the significant subsidiaries and the joint venture of the Group are set out in notes 43 and 44 of the accompanying Group financial statements. The attributable interest of the Group in the income of its subsidiaries for the year ended March 31, 2008 is: R million R million Aggregate amount of income after taxation (186) 564 Share capital Details of the authorised, issued and unissued share capital of the Company as at March 31, 2008, are contained in note 21 and note 19 of the accompanying Group and Company financial statements respectively. Share repurchase Shareholders approved a special resolution granting a general authority for the repurchase of shares by the Company at its annual general meeting of October 26, The Company repurchased 12,071,344 ordinary shares at a value of R1,647 million (including costs) during the year under review. As of March 31, 2008, 4,444,138 of these shares had not yet been cancelled from the issued share capital by the Registrar of Companies. The remainder of these shares have been cancelled as issued share capital and restored as authorised but unissued share capital. Borrowing powers In terms of the Company s articles of association, Telkom has unlimited borrowing powers subject to the restrictive financial covenants of the TL 20 loan. Capital expenditure and commitments Details of the Company s capital expenditure on property, plant and equipment as well as intangibles are set out in notes 9 and 10 of the accompanying financial statements, while details of the Company s capital commitments are set out in note 33. Details of the Group s capital expenditure on property, plant and equipment as well as intangibles are set out in notes 10 and 11 of accompanying financial statements, while details of the Group s capital commitments are set out in note 37. Events subsequent to balance sheet date Events subsequent to the balance sheet date are set out in note 45 of the accompanying Group financial statements and note 37 of the Company financial statements. Directorate The following changes occurred in the composition of the Board from April 1, 2007 to date of this report. Appointments RJ September May 8, 2007 MJ Lamberti May 29, 2007 RJ Huntley September 20, 2007 Dr VB Lawrence September 20, 2007 Dr E Spio-Garbrah September 20, 2007 B Molefe January 30, 2008 AG Rhoda March 5, 2008 B Molefe April 22, 2008 (as alternate to AG Rhoda) B Molefe July 3, 2008 Resignations LLR Molotsane April 5, 2007 PL Zim April 11, 2007 M Mostert September 19, 2007 DD Tabata September 19, 2007 YR Tenza September 19, 2007 TF Mosololi October 26, 2007 TD Mahloele January 30, 2008 B Molefe March 5, 2008 MJ Lamberti June 3, 2008 AG Rhoda July 3, 2008 B Molefe July 3, 2008 (as alternate to AG Rhoda) The Board of Directors at date of this report are as follows: ST Arnold (Chairman) RJ September (Chief Executive Officer) B du Plessis RJ Huntley VB Lawrence PCS Luthuli KST Matthews B Molefe E Spio-Garbrah

79 Directors report (continued) Details of each director may be found on page 26 in the Management review section. Directors interests At March 31, 2008, none of Telkom s directors other than Mr RJ September held any direct and indirect, beneficial and non-beneficial interests in the share capital of the company. Mr RJ September directly holds 7,155 ordinary shares in the capital of Telkom. At January 28, 2008 Mr MJ Lamberti sold 175,000 shares that he held in an indirect non beneficial capacity. Details of the Company Secretary s business address and the company s registered office are set out on the ibc page in the administration section and on page 109. Telkom Annual Report

80 Consolidated income statement Total revenue ,260 52,157 56,865 Operating revenue ,625 51,619 56,285 Other income Operating expenses 33,428 37,533 42,337 Employee expenses 5.1 7,489 8,454 9,220 Payments to other operators 5.2 6,826 7,590 9,169 Selling, general and administrative expenses ,273 12,902 14,409 Service fees 5.4 2,114 2,291 2,571 Operating leases Depreciation, amortisation, impairment and write-offs 5.6 5,876 5,315 6,130 Operating profit 14,677 14,470 14,482 Investment income Finance charges and fair value movements 7 1,223 1,125 1,803 Interest 1,346 1,327 1,885 Foreign exchange and fair value movement (123) (202) (82) Profit before taxation 13,851 13,580 12,876 Taxation 8 4,523 4,731 4,704 Profit for the year 9,328 8,849 8,172 Attributable to: Notes Rm Rm Rm Equity holders of Telkom 9,189 8,646 7,975 Minority interest ,328 8,849 8,172 Basic earnings per share (cents) 9 1, , ,565.0 Diluted earnings per share (cents) 9 1, , ,546.9 Dividend per share (cents) ,

81 Consolidated balance sheet at March 31, Notes Rm Rm Rm Assets Non-current assets 44,813 48,770 57,763 Property, plant and equipment 10 37,274 41,254 46,815 Intangible assets 11 3,910 5,111 8,468 Investments 13 2,894 1,384 1,448 Deferred expenses Finance lease receivables Deferred taxation Current assets 12,731 10,376 12,609 Short-term investments Inventories ,093 1,287 Income tax receivable Current portion of deferred expenses Current portion of finance lease receivables Trade and other receivables 18 6,399 7,303 8,986 Other financial assets Cash and cash equivalents 20 4, ,134 Total assets 57,544 59,146 70,372 Equity and liabilities Equity attributable to equity holders of Telkom 29,165 31,724 32,815 Share capital and premium 21 6,791 5,329 5,208 Treasury shares 22 (1,809) (1,774) (1,638) Share-based compensation reserve Non-distributable reserves 24 1,128 1,413 1,292 Retained earnings 25 22,904 26,499 27,310 Minority interest Total equity 29,466 32,008 33,337 Non-current liabilities 12,391 8,554 15,104 Interest-bearing debt 27 7,655 4,338 9,403 Other financial liabilities Provisions 28 2,677 1,443 1,675 Deferred revenue ,021 1,128 Deferred taxation 16 1,068 1,716 1,979 Telkom Annual Report 2008 Current liabilities 15,687 18,584 21,931 Trade and other payables 30 6,103 7,237 8,771 Shareholders for dividend Current portion of interest-bearing debt 27 3,468 6,026 6,330 Current portion of provisions 28 1,660 2,095 2,181 Current portion of deferred revenue 14 1,975 1,983 2,593 Income tax payable 33 1, Other financial liabilities Credit facilities utilised , Total liabilities 28,078 27,138 37,035 Total equity and liabilities 57,544 59,146 70,372

82 Consolidated statement of changes in equity Attributable to equity holders of Telkom Sharebased Noncompen- distri- Share Share Treasury sation butable Retained Minority Total capital premium shares reserve reserves earnings Total interest equity Rm Rm Rm Rm Rm Rm Rm Rm Rm Balance at April 1, ,570 2,723 (1,812) ,232 26, ,361 Total income and expense for the year 52 9,189 9, ,373 Profit for the year 9,189 9, ,328 Foreign currency translation reserve (net of tax of RNil) (refer to note 24) (7) 45 Dividend declared (refer to note 34) (4,801) (4,801) (78) (4,879) Transfer to non-distributable reserves (refer to note 24) 716 (716) Shares vested and re-issued (refer to note 23) 3 (3) Increase in share-based compensation reserve (refer to note 23) Acquisition of subsidiaries and minorities (refer to note 35) Shares bought back and cancelled (refer to note 21) (121) (1,381) (1,502) (1,502) Balance at March 31, ,449 1,342 (1,809) 151 1,128 22,904 29, ,466 Total income and expense for the year 46 8,646 8, ,909 Profit for the year 8,646 8, ,849 Foreign currency translation reserve (net of tax of R4 million) (refer to note 24) Dividend declared (refer to note 34) (4,678) (4,678) (166) (4,844) Transfer to non-distributable reserves (refer to note 24) 239 (239) Increase in share-based compensation reserve (refer to note 23) Shares vested and re-issued (refer to note 23) 35 (35) Acquisition of subsidiaries and minorities (refer to note 35) (68) (68) Shares bought back and cancelled (refer to note 21) (120) (1,342) (134) (1,596) (1,596) Balance at March 31, ,329 (1,774) 257 1,413 26,499 31, ,008 Total income and expense for the year 529 7,975 8, , Profit for the year 7,975 7, ,172 Revaluation of available-for-sale investment (net of tax of R1 million) Foreign currency translation reserve (net of tax of R6 million) (refer to note 24) Dividend declared (refer to note 34) (5,627) (5,627) (65) (5,692) Transfer to non-distributable reserves (refer to note 24) 11 (11) Increase in share-based compensation reserve (refer to note 23) Shares vested and re-issued (refer to note 23) 136 (136) Acquisition of subsidiaries and minorities (refer to note 35) Shares bought back and cancelled (refer to note 21) (121) (1,526) (1,647) (1,647) Minority put option (refer to note 12) (661) (661) (661) Balance at March 31, ,208 (1,638) 643 1,292 27,310 32, ,337

83 Consolidated cash flow statement Notes Rm Rm Rm Cash flows from operating activities 9,506 9,356 10,603 Cash receipts from customers 46,958 50,979 55,627 Cash paid to suppliers and employees (27,234) (30,459) (34,371) Cash generated from operations 31 19,724 20,520 21,256 Interest received Dividends received Finance charges paid 32 (1,316) (1,115) (1,077) Taxation paid 33 (4,550) (5,690) (4,277) Cash generated from operations before dividend paid 14,390 14,140 16,335 Dividend paid 34 (4,884) (4,784) (5,732) Cash flows from investing activities (7,286) (10,412) (14,106) Proceeds on disposal of property, plant and equipment and intangible assets Proceeds on disposal of investments Additions to property, plant and equipment and intangible assets (7,396) (10,037) (11,657) Acquisition of subsidiaries and minorities 35 (445) (2,462) Additions to other investments (475) (61) (164) Cash flows from financing activities (258) (2,920) 2,943 Loans raised 4,123 5,624 23,877 Loans repaid (7,399) (6,922) (19,315) Shares bought back and cancelled (1,502) (1,596) (1,647) Finance lease obligation repaid (24) (37) (61) Decrease in net financial assets 4, Net increase/(decrease) in cash and cash equivalents 1,962 (3,976) (560) Net cash and cash equivalents at beginning of the year 2,301 4, Effect of foreign exchange rate differences (8) Net cash and cash equivalents at end of the year 20 4, (208) Telkom Annual Report

84 Notes to the consolidated annual financial statements Corporate information Telkom SA Limited ( Telkom ) is a company incorporated and domiciled in the Republic of South Africa ( South Africa ) whose shares are publicly traded. The main objective of Telkom, its subsidiaries and joint ventures ( the Group ) is to supply telecommunication, broadcasting, multimedia, technology, information and other related information technology services to the general public, as well as mobile communication services through the Vodacom Group (Proprietary) Limited ( Vodacom ) in South Africa and certain other African countries. The Group s services and products include: fixed-line subscription and connection services to postpaid, prepaid and private payphone customers using PSTN lines, including ISDN lines, and the sale of subscription based valueadded voice services and customer premises equipment rental and sales; fixed-line traffic services to postpaid, prepaid and payphone customers, including local, long distance, fixed-to-mobile, international outgoing and international voice-over-internet protocol traffic services; interconnection services, including terminating and transiting traffic from South African mobile operators, as well as from international operators and transiting traffic from mobile to international destinations; fixed-line data services, including domestic and international data transmission services, such as point-to-point leased lines, ADSL services, packet-based services, managed data networking services and internet access and related information technology services; e-commerce, including internet access service provider, application service provider, hosting, data storage, and security services; mobile communications services, including voice services, data services, value-added services and handset sales through Vodacom; and other services including directory services, through our TDS Directory Operations Group, wireless data services, through our Swiftnet (Proprietary) Limited subsidiary, television media services through our Telkom Media Group, internet services outside South Africa, through our Africa Online Limited subsidiary and information, communication and telecommunication operating services in Nigeria, through our newly acquired Multi- Links Telecommunications Limited subsidiary. 2. Significant accounting policies Basis of preparation The consolidated annual financial statements comply with International Financial Reporting Standards ( IFRS ) of the International Accounting Standards Board ( IASB ) and the Companies Act of South Africa, The financial statements are prepared on the historical cost basis, with the exception of certain financial instruments and share-based payments which are measured at grant date fair value. Details of the Group s significant accounting policies are set out below, and are consistent with those applied in the previous financial year except for the following: adoption of amendment to IAS1; adoption of IFRS7, IFRIC8, IFRIC9, IFRIC10, IFRIC11 and Circular 8/2007; and identification of a new segment. The principal effects of these changes are discussed below. Adoption of amendments to standards and new interpretations The following revised standards and interpretations have been adopted during the year under review: Amendment to IAS1 Presentation of Financial Statements This amendment is effective for annual periods beginning on or after January 1, As a result of the pronouncement of IFRS7 Financial Instruments: Disclosures, IAS1 has been amended to require the disclosure of the entity s objective, policies and processes for managing capital, quantitative data about what the entity regards as capital, whether the entity has complied with any capital requirements and if it has not complied, the consequences of such non-compliance. The impact of this amendment has been disclosed under note 12. IFRS7 Financial Instruments: Disclosures This standard is effective for annual periods beginning on or after January 1, IFRS7 supersedes disclosure in IAS32. All financial instruments disclosures will now be provided in terms of IFRS7. One of the main disclosure requirements added by IFRS7 is that an entity must group its financial instruments into classes of similar instruments, and when disclosures are required, make disclosures by class. IFRS7 also requires information about the significance of financial instruments and information about the nature and extent of risks arising from financial instruments. The impact of this standard is to expand on certain disclosures relating to financial instruments and requires certain additional disclosures (refer to note 12). IFRIC8 Scope of IFRS2 The interpretation is effective for annual periods beginning on or after May 1, The interpretation clarifies that IFRS2 applies to transactions in which an entity receives goods or services as consideration for equity instruments of the entity. This includes transactions in which the entity cannot identify specifically some or all of the goods or services received. The impact of the interpretation on the consolidated annual financial statements is not material since the Group has not transacted with other parties using equity as a purchase consideration for the transaction, other than those paid to employees in share-based payment transactions. IFRIC9 Reassessment of Embedded Derivatives The interpretation is effective for annual periods beginning on or after June 1, The interpretation clarifies that an entity should assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. It further clarifies that reassessment is only allowed when there is a change in the terms of the contract which significantly modifies the cash flows that would otherwise be required under the contract. The interpretation does not have a material impact on the consolidated annual financial statements.

85 Notes to the consolidated annual financial statements (continued) 2. Significant accounting policies (continued) Adoption of amendments to standards and new interpretations (continued) IFRIC10 Interim Financial Reporting and Impairment The interpretation is effective for annual periods beginning on or after November 1, The interpretation clarifies that an entity should not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument classified as available-for-sale or financial asset carried at cost. The interpretation does not have a material impact on the consolidated annual financial statements. arrangement other than service conditions and performance conditions will be considered to be non-vesting conditions. IFRS2 (as revised) specifies that, when estimating the fair value of equity instruments granted, an entity shall take into account all non-vesting conditions (i.e. all conditions other than service and performance conditions) and vesting conditions that are market conditions (i.e. conditions that are related to the market price of the entity s equity instruments for example, attaining a specified share price). The impact of this amendment is currently being evaluated. IFRS3 Business Combinations-comprehensive revision on applying the acquisition method IFRIC11 IFRS2 Group and Treasury Share Transactions The interpretation is effective for annual periods beginning on or after March 1, The interpretation clarifies that regardless of whether the entity chooses or is required to buy equity instruments from another party to satisfy its obligations to its employees under the share-based payment arrangement by delivery of its own shares, the transaction should be accounted for as equity settled. This interpretation also applies regardless of whether the employee s rights to the equity instruments were granted by the entity itself or by its shareholders or was settled by the entity itself or its shareholders. Share-based payments involving the Group s own equity instruments in which the Group chooses or is required to buy its own equity instruments to settle the share-based payment obligation are currently accounted for as equity-settled share-based payment transactions under IFRS2. The interpretation has had no impact on the consolidated annual financial statements. Circular 8/2007 Headline earnings The circular was issued by the South African Institute of Chartered Accountants (SAICA) and is applicable for financial periods ending on or after August 31, Circular 8/2007 supersedes Circular 7/2002 and it defines rules for calculating headline earnings per share, which is an additional per share measure permitted by IAS33 Earnings per Share. It further requires a disclosure of a detailed reconciliation of headline earnings to the earnings numbers used in the calculation of basic earnings per share in accordance with the requirements of IAS33. The Group adopted the provisions of Circular 8/2007 in the reporting period beginning on April 1, 2007 and the adoption has had no impact other than additional disclosure as required by the Circular. Accounting pronouncements not yet adopted The Group has not early adopted the following standards, interpretations and amendments that have been issued and are not yet effective: IFRS2 Vesting Conditions and Cancellations This amendment is effective for annual periods beginning on or after January 1, The amendments to IFRS2 Share-based Payment clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement. All features of a share-based payment The revised standard is effective for annual periods beginning on or after July 1, The revised IFRS3 requires the consideration for the acquisition, including the fair value of any contingent consideration payable to be measured at fair value at the acquisition date. The revised standard only permits subsequent changes to the measurement of contingent consideration as a result of additional information about facts and circumstances that existed at the acquisition date. All other changes (e.g. changes resulting from events after the acquisition date such as the acquiree meeting an earnings target, reaching a specified share price, or meeting a milestone on a research and development project) are recognised in profit or loss. Acquisition-related costs are now required to be expensed. Business combinations involving only mutual entities and business combinations achieved by contract alone have also been included in IFRS3. Consequential amendments arising from revisions to IFRS3 on IAS27 Consolidated and separate financial statements The revised IAS27 specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. No gain or loss is recognised on such transactions and goodwill is not remeasured. Any difference between the change in the Non Controlling Interest and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent. Consequential amendments arising from revisions to IFRS3 on IAS28 Investments in Associates; IAS31 Interests in Joint Ventures Amendments to IAS28 and IAS31 extend the treatment required for loss of control to these standards. For partial disposals of associates and joint ventures, the amended standards stipulate that if an investor loses significant influence over an associate, it derecognises that associate and recognises in profit or loss the difference between the sum of the proceeds received and any retained interest, and the carrying amount of the investment in the associate at the date significant influence is lost. A similar treatment is required when an investor loses joint control over a jointly controlled entity. The possible impact of this standard is currently being evaluated. Telkom Annual Report

86 Notes to the consolidated annual financial statements (continued) Significant accounting policies (continued) Accounting pronouncements not yet adopted (continued) IFRS8 Operating Segments This standard is effective for annual periods beginning on or after January 1, The significant change to the standard is that it requires segments to be disclosed based on the information that management uses to make decisions about operating matters. IFRS8 sets out the requirements for disclosure of information about an entity s operating segments and also about the entity s products and services, the geographical areas in which it operates, and its major customers. IFRS8 further requires the entity to disclose factors used to identify the entity s operating segments and type of products and services from which each operating segment derives its revenues. The impact of this standard is currently being evaluated. IAS1 Presentation of Financial Statements (revised) The revised standard is effective for annual periods beginning on or after January 1, The changes made to IAS1 require information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. This will enable users to analyse changes in a Group s equity resulting from transactions with owners in their capacity as owners (such as dividends and share repurchases) separately from non-owner changes (such as transactions with third parties). The revised standard gives preparers of financial statements the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements. The revisions include changes in the titles of some of the financial statements to reflect their function more clearly. The new titles will be used in accounting standards, but are not mandatory for use in financial statements. The impact of this standard will be that the presentation of the financial statements will change. IAS23 Borrowing Costs The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised. The revised Standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, The Group does not expect the adoption of the standard to have a material impact since the Group has always applied the allowed alternative of capitalising borrowing costs under the current standard. Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, puttable financial instruments The amendment is effective for annual periods beginning on or after January 1, In January 2008, the IASB amended IAS32 and IAS1 Presentation of Financial Statements with respect to the balance sheet classification of puttable financial instruments and obligations arising only on liquidation. As a result of the amendments, some financial instruments that currently meet the definition of a financial liability will be classified as equity because they represent the residual interest in the net assets of the entity. The impact of this amended standard is currently being evaluated. IFRIC12 Service Concession Arrangements The interpretation is effective for annual periods beginning on or after January 1, The interpretation clarifies that contractual service arrangements do not convey the right to control the use of the public service infrastructure to the operator, instead the operator acts as a service provider. The infrastructure under these arrangements shall therefore not be recognised as the property, plant and equipment of the operator. The operator shall recognise and measure revenue in accordance with IAS11 and IAS18 for the services it performs. The operator should recognise the asset as an intangible asset for the right (or licence) it receives to charge the users of the public service or as a financial asset when it has the right to receive cash from the grantor for construction services. The interpretation provides guidance on the recognition and measurement of the various aspects of service concession arrangements from an operator s perspective. The impact of this interpretation is currently being evaluated. IFRIC13 Customer Loyalty Programmes The interpretation is effective for annual periods beginning on or after July 1, The interpretation addresses accounting by entities that grant loyalty award credits (such as points or travel miles) to customers who buy other goods or services. It specifically requires these entities to recognise the obligation to provide free or discounted goods or services ( awards ) to customers who redeem award credits. The interpretation requires companies to estimate the value of the points to the customer and defer this amount of revenue and recognise a liability until they have fulfilled their obligations to supply awards. In effect, the award is accounted for as a separate component of the sale transaction. The possible impact of this interpretation is currently being evaluated. IFRIC14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The interpretation is effective for annual periods beginning on or after January 1, The interpretation addresses the interaction between a minimum funding requirement and the limit placed by paragraph 58 of IAS19 on the measurement of the defined benefit asset. When determining the limit on a defined benefit asset in accordance with IAS19.58, IFRIC14 requires an entity to measure any economic benefits available to them in the form of refunds or reductions in future contributions at the maximum amount that is consistent with the terms and conditions of the plan and any statutory requirements in the jurisdiction of the plan. The interpretation states that the employer only needs to have an unconditional right to use the surplus at some point during the life of the plan or on its wind up in order for a surplus to be recognised. The Group is currently evaluating the potential impact that the interpretation will have on the financial position or results of operations. Significant accounting judgements and estimates The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Although these estimates are based on management s best knowledge of current events and actions that the Group may undertake in the future, actual results may ultimately differ from those estimates.

87 Notes to the consolidated annual financial statements (continued) 2. Significant accounting policies (continued) Significant accounting judgements and estimates (continued) The presentation of the results of operations, financial position and cash flows in the financial statements of the Group is dependent upon and sensitive to the accounting policies, assumptions and estimates that are used as a basis for the preparation of these financial statements. Management has made certain judgements in the process of applying the Group s accounting policies. These, together with the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, are as follows: Revenue recognition To reflect the substance of each transaction, revenue recognition criteria are applied to each separately identifiable component of a transaction. In order to account for multiple-element revenue arrangements in developing its accounting policies, the Group considered the guidance contained in the United States Financial Accounting Standards Board ( FASB ) Emerging Issues Task Force No Revenue Arrangements with Multiple Deliverables. Judgement is required to separate those revenue arrangements that contain the delivery of bundled products or services into individual units of accounting, each with its own earnings process, when the delivered item has stand-alone value and the undelivered item has fair value. Further judgement is required to determine the relative fair values of each separate unit of accounting to be allocated to the total arrangement consideration. Changes in the relative fair values could affect the allocation of arrangement consideration between the various revenue streams. Judgement is also required to determine the expected customer relationship period. Any changes in these assessments may have a significant impact on revenue and deferred revenue. Property, plant and equipment and intangible assets The useful lives of assets are based on management s estimation. Management considers the impact of changes in technology, customer service requirements, availability of capital funding and required return on assets and equity to determine the optimum useful life expectation for each of the individual categories of property, plant, equipment and intangible assets. Due to the rapid technological advancement in the telecommunications industry as well as Telkom s plan to migrate to a next generation network over the next few years, the estimation of useful lives could differ significantly on an annual basis due to unexpected changes in the roll-out strategy. The impact of the change in the expected useful life of property, plant and equipment is described more fully in note 5.6. The estimation of residual values of assets is also based on management s judgement whether the assets will be sold or used to the end of their useful lives and what their condition will be like at that time. For intangible assets that incorporate both a tangible and intangible portion, management uses judgement to assess which element is more significant to determine whether it should be treated as property, plant and equipment or intangible assets. Asset retirement obligations Management judgement is exercised when determining whether an asset retirement obligation exists, and in determining the present value of expected future cash flows and discount rate when the obligation to dismantle or restore the site arises, as well as the estimated useful life of the related asset. Impairments of property, plant and equipment and intangible assets Management is required to make judgements concerning the cause, timing and amount of impairment. In the identification of impairment indicators, management considers the impact of changes in current competitive conditions, cost of capital, availability of funding, technological obsolescence, discontinuance of services and other circumstances that could indicate that an impairment exists. The Group applies the impairment assessment to its separate cash-generating units. This requires management to make significant judgements concerning the existence of impairment indicators, identification of separate cash-generating units, remaining useful lives of assets and estimates of projected cash flows and fair value less costs to sell. Management judgement is also required when assessing whether a previously recognised impairment loss should be reversed. Where impairment indicators exist, the determination of the recoverable amount of a cash-generating unit requires management to make assumptions to determine the fair value less costs to sell and value in use. Key assumptions on which management has based its determination of fair value less costs to sell include the existence of binding sale agreements, and for the determination of value in use include projected revenues, gross margins, average revenue per asset component, capital expenditure, expected customer bases and market share. The judgements, assumptions and methodologies used can have a material impact on the fair value and ultimately the amount of any impairment. Impairment of other financial assets At each balance sheet date management assesses whether there are indicators of impairment of financial assets, including equity investments. If such evidence exists, the estimated present value of the future cash flows of that asset is determined. Management judgement is required when determining the expected future cash flows. To determine whether the decline in fair value is prolonged, reliance is placed on an assessment by management regarding the future prospects of the investee. In measuring impairments, quoted market prices are used, if available, or projected business plan information from the investee is used for those financial assets not carried at fair value. Impairment of receivables An impairment is recognised on trade receivables that are assessed to be impaired. The impairment is based on an assessment of the extent to which customers have defaulted on payments already due and an assessment on their ability to make payments based on their credit worthiness and historical write-offs experience. Should the assumptions regarding the financial condition of the customer change, actual write-offs could differ significantly from the impaired amount. Telkom Annual Report

88 Notes to the consolidated annual financial statements (continued) Significant accounting policies (continued) Significant accounting judgements and estimates (continued) Leases The determination of whether an arrangement is, or contains a lease is based on whether, at the date of inception, the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Deferred taxation asset Management judgement is exercised when determining the probability of future taxable profits which will determine whether deferred tax assets should be recognised or derecognised. The realisation of deferred tax assets will depend on whether it is possible to generate sufficient taxable income, taking into account any legal restrictions on the length and nature of the taxation asset. When deciding whether to recognise unutilised taxation credits, management needs to determine the extent that future payments are likely to be available for set-off. In the event that the assessment of future payments and future utilisation changes, the change in the recognised deferred tax asset must be recognised in profit or loss. Taxation The tax rules and regulations in South Africa as well as the other African countries within which the Group operates are highly complex and subject to interpretation. Additionally, for the foreseeable future, management expects South African tax laws to further develop through changes in South Africa s existing tax structure as well as clarification of the existing tax laws through published interpretations and the resolution of actual tax cases. Management has made a judgement that all outstanding tax credits will be available for utilisation before the tax regime change is effective, despite the change of secondary tax on companies to withholding tax. The growth of the Group, following its geographical expansion into other African countries over the past few years, has made the estimation and judgement required in recognising and measuring deferred taxation balances more challenging. The resolution of taxation issues is not always within the control of the Group and it is often dependent on the efficiency of the legal processes in the relevant taxation jurisdictions in which the Group operates. Issues can, and often do, take many years to resolve. Payments in respect of taxation liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result there can be substantial differences between the taxation charge in the consolidated income statement and the current taxation payments. Group entities are regularly subject to evaluation, by the relevant tax authorities, of its historical tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain tax rules to the business of the relevant Group entities. These disputes may not necessarily be resolved in a manner that is favourable for the Group. Additionally the resolution of the disputes could result in an obligation for the Group that exceeds management s estimate. The Group has historically filed, and continues to file, all required income tax returns. Management believes that the principles applied in determining the Group s tax obligations are consistent with the principles and interpretations of the relevant countries tax laws. Deferred taxation rate Management makes judgements on the tax rate applicable based on the Group s expectations at balance sheet date on how the asset is expected to be recovered or the liability is expected to be settled. Employee benefits The Group provides defined benefit plans for certain postemployment benefits. The Group s net obligation in respect of defined benefits is calculated separately for each plan by estimating the amount of future benefits earned in return for services rendered. The obligation and assets related to each of the post-retirement benefits are determined through an actuarial valuation. The actuarial valuation relies heavily on assumptions as disclosed in note 29. The assumptions determined by management make use of information obtained from the Group s employment agreements with staff and pensioners, market related returns on similar investments, market related discount rates and other available information. The assumptions concerning the expected return on assets and expected change in liabilities are determined on a uniform basis, considering long-term historical returns and future estimates of returns and medical inflation expectations. In the event that further changes in assumptions are required, the future amounts of post-retirement benefits may be affected materially. The discount rate reflects the average timing of the estimated defined benefit payments. The discount rate is based on long term South African government bonds with the longest maturity period as reported by the Bond Exchange of South Africa. The discount rate is expected to follow the trend of inflation. The overall expected rate of return on assets is determined based on the market prices prevailing at that date, applicable to the period over which the obligation is to be settled. Telkom provides equity compensation in the form of the Telkom Conditional Share Plan to its employees. The related expense and reserve are determined through an actuarial valuation which relies heavily on assumptions. The assumptions include employee turnover percentages and whether specified performance criteria will be met. Changes to these assumptions could affect the amount of expense ultimately recognised in the financial statements.

89 Notes to the consolidated annual financial statements (continued) 2. Significant accounting policies (continued) Significant accounting judgements and estimates (continued) Provisions and Contingent liabilities Management judgement is required when recognising and measuring provisions and when measuring contingent liabilities as set out in notes 28 and 38 respectively. The probability that an outflow of economic resources will be required to settle the obligation must be assessed and a reliable estimate must be made of the amount of the obligation. Provisions are discounted where the effect of discounting is material based on management s judgement. The discount rate used is the rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability, all of which requires management judgement. The Group is required to recognise provisions for claims arising from litigation when the occurrence of the claim is probable and the amount of the loss can be reasonably estimated. Liabilities provided for legal matters require judgements regarding projected outcomes and ranges of losses based on historical experience and recommendations of legal counsel. Litigation is however unpredictable and actual costs incurred could differ materially from those estimated at the balance sheet date. Held-to-maturity financial assets Management have reviewed the Group s held-to-maturity financial assets in the light of its capital management and liquidity requirements and have confirmed the Group s positive intention and ability to hold those assets to maturity. Summary of significant accounting policies Basis of consolidation The consolidated financial statements include those of Telkom, its foreign and domestic subsidiaries and joint ventures. Subsidiaries are those entities over which financial and operating policies the Group has the ability to exercise control, so as to obtain majority of the benefits from their activities. Joint ventures are those enterprises over which the group exercises joint control in terms of a contractual agreement. Joint ventures are accounted for using the proportionate consolidation method on a line by line basis. Intra-group balances and transactions, and any unrealised gains and losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Transactions with jointly controlled entities together with related unrealised gains and losses and resulting balances are eliminated to the extent of the Group s interest in the entities. Consolidation commences from the date that effective control passes to the Group. Business combinations On acquisition of a subsidiary or joint venture, any excess of the purchase price over the fair value of the Group s interest in the net assets is recognised as goodwill. Minority interests are calculated on the fair value of assets and liabilities. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting year during which the Group has control. Minority shareholders are treated as equity participants and, therefore, all acquisitions of minority interest by the Group in subsidiary companies are accounted for using the parent entity extension method. Under this method, the assets and liabilities of the subsidiary are not restated to reflect their fair values at the date of the acquisition. The difference between the purchase price and the minority interest s share of the assets and liabilities reflected within the consolidated balance sheet at the date of the acquisition is therefore reflected as goodwill. Minority interests are separately presented in the consolidated financial statements. Operating revenue The Group provides fixed-line communication services, mobile communication services and other services. Other includes data services, directory services and communication related products. The Group provides such services to business, residential, payphone and mobile customers. Revenue represents the fair value of fixed or determinable consideration that has been received or is receivable. Revenue for services is measured at amounts invoiced to customers and excludes Value Added Tax. Revenue is recognised when there is evidence of an arrangement, collectability is reasonably assured, and the delivery of the product or service has occurred. In certain circumstances revenue is split into separately identifiable components and recognised when the related components are delivered in order to reflect the substance of the transaction. The value of components is determined using verifiable objective evidence. The Group does not provide customers with the right to a refund. Fixed-line and Other Subscriptions, connections and other usage The Group provides telephone and data communication services under post paid and prepaid payment arrangements. Revenue includes fees for installation and activation, which are deferred over the expected customer relationship period. Costs incurred on first time installations that form an integral part of the network are capitalised and depreciated over the expected average customer relationship period. All other installation and activation costs are expensed as incurred. Post paid and prepaid service arrangements include subscription fees, typically monthly fees, which are recognised over the subscription period. Revenue related to sale of communication equipment, products and value-added services is recognised upon delivery and acceptance of the product or service by the customer. Traffic (Domestic, Fixed-to-mobile and International) Prepaid Prepaid traffic service revenue collected in advance is deferred and recognised based on actual usage or upon expiration of the usage period, whichever comes first. The terms and conditions of certain prepaid products allow the carry over of unused minutes. Revenue related to the carry over of unused minutes is deferred until usage or expiration. Telkom Annual Report

90 Notes to the consolidated annual financial statements (continued) Significant accounting policies (continued) Operating revenue (continued) Fixed-line and Other (continued) Traffic (Domestic, Fixed-to-mobile and International) (continued) Payphones Payphone service coin revenue is recognised when the service is provided. Payphone service card revenue collected in advance is deferred and recognised based on actual usage or upon expiration of the usage period, whichever comes first. Telkom provides incentives to its retail payphone card distributors as trade discounts. Revenue for retail payphone cards is recorded as traffic revenue, net of these discounts as the cards are used. Postpaid Revenue related to local, long distance, network-to-network, roaming and international call connection services is recognised when the call is placed or the connection provided. Interconnection Interconnection revenue for call termination, call transit, and network usage is recognised as the traffic flow occurs. Data The Group provides data communication services under post paid and prepaid payment arrangements. Revenue includes fees for installation and activation, which are deferred over the expected average customer relationship period. Costs incurred on first time installations that form an integral part of the network are capitalised and depreciated over the life of the expected average customer relationship period. All other installation and activation costs are expensed as incurred. Post paid and prepaid service arrangements include subscription fees, typically monthly fees, which are recognised over the subscription period. Directory services Included in other are directory services. Revenue is recognised when paper directories are released for distribution, as the significant risks and rewards of ownership have been transferred to the buyer. Electronic directories revenue is recognised on a monthly basis, as earned. Sundry revenue Sundry revenue is recognised when the economic benefit flows to the Group and the earnings process is complete. Dealer incentives Telkom provides incentives to its retail payphone card distributors as trade discounts. Incentives are based on sales volume and value. Revenue for retail payphone cards is recorded as traffic revenue, net of these discounts as the cards are used. Mobile The Vodacom Group invoices its independent service providers for the revenue billed by them on behalf of the Group. The Group, within its contractual arrangements with its agents, pays them administrative fees. The Group receives in cash, the net amount equal to the gross revenue earned less the administrative fees payable to the agents. Contract products Contract products that may include deliverables such as a handset and 24-month service are defined as arrangements with multiple deliverables. The arrangement consideration is allocated to each deliverable, based on the fair value of each deliverable on a stand alone basis as a percentage of the aggregated fair value of the individual deliverables. Revenue allocated to the identified deliverables in each revenue arrangement and the cost applicable to these identified deliverables are recognised based on the same recognition criteria of the individual deliverable at the time the product or service is delivered. Vodacom revenue from the handset is recognised when the product is delivered limited to the amount of cash received. Monthly service revenue received from the customer is recognised in the period in which the service is delivered. Airtime revenue is recognised on the usage basis. The terms and conditions of the bundled airtime products, where applicable, allow the carry over of unused airtime. The unused airtime is deferred in full. Deferred revenue related to unused airtime is recognised when utilised by the customer. Upon termination of the customer contract, all deferred revenue for unused airtime is recognised in revenue. Prepaid products Prepaid products that may include deliverables such as a SIM-card and airtime are defined as arrangements with multiple deliverables. The arrangement consideration is allocated to each deliverable, based on the fair value of each deliverable on a stand alone basis as a percentage of the aggregated fair value of the individual deliverables. Revenue allocated to the identified deliverables in each revenue arrangement and the cost applicable to these identified deliverables are recognised based on the same recognition criteria of the individual deliverable at the time the product or service is delivered. Revenue from the SIM-card representing activation fees is recognised over the average useful life of a prepaid customer. Airtime revenue is recognised on the usage basis. Unused airtime is deferred in full. Deferred revenue related to unused airtime is recognised when utilised by the customer. Upon termination of the customer relationship, all deferred revenue for unused airtime is recognised in revenue. Upon purchase of an airtime voucher the customer receives the right to make outgoing voice and data calls to the value of the airtime voucher. Revenue is recognised as the customer utilises the voucher. Deferred revenue and costs related to unactivated starter packs which do not contain any expiry date, is recognised in the period when the probability of these starter packs being activated by a customer becomes remote. In this regard the Group applies a period of 36 months before these revenue and costs are released to the consolidated income statement.

91 Notes to the consolidated annual financial statements (continued) 2. Significant accounting policies (continued) Operating revenue (continued) Mobile (continued) Data Revenue, net of discounts, from data services is recognised when the Group has performed the related service and depending on the nature of the service, is recognised either at the gross amounts billed to the customer or the amount receivable by the Group as commission for facilitating the service. Equipment sales All equipment sales are recognised only when delivery and acceptance has taken place. Equipment sales to third party service providers are recognised when delivery is accepted. No rights of return exist on sales to third party service providers. Mobile number portability Revenue transactions from mobile number portability are accounted for in terms of current business rules and revenue recognition policies above. Interest on debtors accounts Interest is raised on overdue accounts on an effective interest rate method and recognised in the income statement. Marketing Marketing costs are recognised as an expense as incurred. Incentives Incentives paid to service providers and dealers for products delivered to the customer are expensed as incurred. Incentives paid to service providers and dealers for services delivered are expensed in the period that the related revenue is recognised. Distribution incentives paid to service providers and dealers for exclusivity are deferred and expensed over the contractual relationship period. Investment income Dividends from investments are recognised on the date that the Group is entitled to the dividend. Interest is recognised on a time proportionate basis taking into account the principal amount outstanding and the effective interest rate. Taxation Current taxation The charge for current taxation is based on the results for the year and is adjusted for non-taxable income and non-deductible expenditure. Current taxation is measured at the amount expected to be paid to the taxation authorities, using taxation rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred taxation Deferred taxation is accounted for using the balance sheet liability method on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax is not provided on the initial recognition of goodwill or initial recognition of assets or liabilities which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses, unused tax credits and deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that the related tax benefit will be realised, except in respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures. Deferred income tax assets are recognised only to the extent that it is probable that temporary differences will reverse in the foreseeable future and taxable profit will be available against which temporary differences can be utilised. Deferred tax relating to items recognised directly in equity are recognised in equity and not in the income statement. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Exchange differences arising from the translation of foreign deferred taxation assets and liabilities of foreign entities where the functional currency is different to the local currency, are classified as a deferred taxation expense or income. Secondary taxation on companies Secondary taxation on companies ( STC ) is provided for at a rate of 10% (12.5% before October 1, 2007) on the amount by which dividends declared by the Group exceeds dividends received. Deferred tax on unutilised STC credits is recognised to the extent that STC payable on future dividend payments is likely to be available for set-off. Property, plant and equipment At initial recognition acquired property, plant and equipment are recognised at their purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. The recognised cost includes any directly attributable costs for preparing the asset for its intended use. The cost of an item of property, plant and equipment is recognised as an asset if it is probable that the future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Property, plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Each component of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Depreciation is charged from the date the asset is available for use on a straight-line basis over the estimated useful life and ceases at the earlier of the date that the asset is classified as held for sale and the date the asset is derecognised. Idle assets continue to attract depreciation. Telkom Annual Report

92 Notes to the consolidated annual financial statements (continued) Significant accounting policies (continued) Property, plant and equipment (continued) The estimated useful life of individual assets and the depreciation method thereof are reviewed on an annual basis at balance sheet date. The depreciable amount is determined after taking into account the residual value of the asset. The residual value is the estimated amount that the Group would currently obtain from the disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual values of assets are reviewed on an annual basis at balance sheet date. Assets under construction represents freehold buildings, integral operating software, network and support equipment and includes all direct expenditure as well as related borrowing costs capitalised, but excludes the costs of abnormal amounts of waste material, labour, or other resources incurred in the production of selfconstructed assets. Freehold land is stated at cost and is not depreciated. Amounts paid by the Group on improvements to assets which are held in terms of operating lease agreements are depreciated on a straightline basis over the shorter of the remaining useful life of the applicable asset or the remainder of the lease period. Where it is reasonably certain that the lease agreement will be renewed, the lease period equals the period of the initial agreement plus the renewal periods. The estimated useful lives assigned to groups of property, plant and equipment are: Years Freehold buildings 15 to 40 Leasehold buildings 7 to 25 Network equipment Cables 20 to 40 Switching equipment 2 to 18 Transmission equipment 5 to 18 Other 1 to 20 Support equipment 5 to 13 Furniture and office equipment 2 to 15 Data processing equipment and software 3 to 10 Other 2 to 15 An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Intangible assets Goodwill Goodwill on acquisition is initially measured as being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities, allocated to cash-generating units where relevant. Goodwill on the acquisition of subsidiaries and joint ventures is included in intangible assets. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses, once the impairment is recognised it is not reversed. Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Licences, software, trademarks, copyrights and other At initial recognition acquired intangible assets are recognised at their purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. The recognised cost includes any directly attributable costs for preparing the asset for its intended use. Internally generated intangible assets are recognised at cost comprising all directly attributable costs necessary to create and prepare the asset to be capable of operating in the manner intended by management. Licences, software, trademarks, copyrights and other intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation commences when the intangible assets are available for their intended use and is recognised on a straight-line basis over the assets expected useful lives. Amortisation ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognised. The residual value of intangible assets is the estimated amount that the Group would currently obtain from the disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Due to the nature of the asset the residual value is assumed to be zero unless there is a commitment by a third party to purchase the asset at the end of its useful life or when there is an active market that is likely to exist at the end of the asset s useful life, which can be used to estimate the residual values. The residual values of intangible assets, amortisation methods and their useful lives are reviewed on an annual basis at balance sheet date. Intangible assets with indefinite useful lives and intangible assets not yet available for use, are tested for impairment annually either individually or at the cash-generating unit level. Such intangible assets are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

93 Notes to the consolidated annual financial statements (continued) 2. Significant accounting policies (continued) Intangible assets (continued) Licences, software, trademarks, copyrights and other (continued) Assets under construction represent application and other non integral software and includes all direct expenditure as well as related borrowing costs capitalised, but excludes the costs of abnormal amounts of waste material, labour, or other resources incurred in the production of self-constructed assets. Intangible assets are derecognised when they have been disposed of or when the asset is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of assets are recognised in the income statement in the year in which they arise. The expected useful lives assigned to intangible assets are: Years Licences 5 to 30 Software 2 to 10 Trademarks, copyrights and other 3 to 15 Asset retirement obligations Asset retirement obligations related to property, plant and equipment and intangible assets are recognised at the present value of expected future cash flows when the obligation to dismantle or restore the site arises. The increase in the related asset s carrying value is depreciated over its estimated useful life. The unwinding of the discount is included in finance charges and fair value movements. Changes in the measurement of an existing liability that result from changes in the estimated timing or amount of the outflow of resources required to settle the liability, or a change in the discount rate are accounted for as increases or decreases to the original cost of the recognised assets. If the amount deducted exceeds the carrying amount of the asset, the excess is recognised immediately in profit or loss. Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a complete sale within one year from the date of classification. Assets are no longer depreciated when they are classified into the category. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets previous carrying amount and fair value less cost to sell. Impairment of property, plant and equipment and intangible assets The Group regularly reviews its assets, other than financial instruments, and cash-generating units for any indication of impairment. When indicators, including changes in technology, market, economic, legal and operating environments occur and could result in changes of the asset s or cash-generating unit s estimated recoverable amount, an impairment test is performed. The recoverable amount of assets or cash-generating units is measured using the higher of the fair value less costs to sell and its value in use, which is the present value of projected cash flows covering the remaining useful lives of the assets. Impairment losses are recognised when the asset s carrying value exceeds its estimated recoverable amount. Where applicable, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Previously recognised impairment losses, other than goodwill, are reviewed annually for any indication that it may no longer exist or may have decreased. If any such indication exists, the recoverable amount of the asset is estimated. Such impairment losses are reversed through the income statement if the recoverable amount has increased as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depreciation or amortisation) had no impairment loss been recognised in prior years. Impairment on goodwill is not reversed. Repairs and maintenance The Group expenses all costs associated with repairs and maintenance, unless it is probable that such costs would result in increased future economic benefits flowing to the Group, and the costs can be reliably measured. Borrowing costs Financing costs directly associated with the acquisition or construction of assets that require more than three months to complete and place in service are capitalised at interest rates relating to loans specifically raised for that purpose, or at the weighted average borrowing rate where the general pool of Group borrowings was utilised. Other borrowing costs are expensed as incurred. Deferred revenue and expenses Activation revenue and costs are recognised in accordance with the principles contained in Emerging Issues Task Force Issue No 00-21, Revenue Arrangements with Multiple Deliverables ( EITF ), issued in the United States. This results in activation revenue and costs up to the amount of the deferred revenue being deferred and recognised systematically over the expected duration of the customer relationship because it is considered to be part of the customers ongoing rights to telecommunication services and the operator s continuing involvement. The excess of the costs over revenues is expensed immediately. Inventories Installation material, maintenance and network equipment inventories are stated at the lower of cost, determined on a weighted average basis, or estimated net realisable value. Merchandise inventories are stated at the lower of cost, determined on a first-in first-out ( FIFO ) basis, or estimated net realisable value. Write-down of inventories arises when, for example, goods are damaged or when net realisable value is lower than carrying value. Telkom Annual Report

94 Notes to the consolidated annual financial statements (continued) Significant accounting policies (continued) Financial instruments Recognition and initial measurement All financial instruments are initially recognised at fair value, plus, in the case of financial assets and liabilities not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue. Financial instruments are recognised when the Group becomes a party to their contractual arrangements. All regular way transactions are accounted for on settlement date. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Subsequent measurement Subsequent to initial recognition, the Group classifies financial assets as at fair value through profit or loss, held-to-maturity investments, loans and receivables, or available-for-sale. The measurement of each is set out below and presented in a table in note 12. The fair value of financial assets and liabilities that are actively traded in financial markets is determined by reference to quoted market prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques such as discounted cash flow analysis. Financial assets at fair value through profit or loss The Group classifies financial assets that are held for trading in the category financial assets at fair value through profit or loss. This category includes bills of exchange and promissory notes. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the future. Derivatives not designated as hedges are also classified as held for trading. On remeasurement to fair value the gains or losses on held for trading financial assets are recognised in net finance charges and fair value movements for the year. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the income statement within finance charges and fair value movements in the period which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Group s right to receive payment is established. Held-to-maturity financial assets The Group classifies non-derivative financial assets with fixed or determinable payments and fixed maturity dates as held-tomaturity when the Group has the positive intention and ability to hold to maturity. This category includes bills of exchange and promissory notes. These assets are subsequently measured at amortised cost. Amortised cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest rate method. This calculation includes all fees paid or received between parties to the contract. For investments carried at amortised cost, gains and losses are recognised in net profit or loss when the investments are sold or impaired. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest rate method. Trade receivables are subsequently measured at the original invoice amount where the effect of discounting is not material. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative assets that are designated as available-for-sale, or are not classified in any of the three preceding categories. Equity instruments are all treated as available-for-sale financial instruments. After initial recognition, available-for-sale financial assets are measured at fair value, with gains and losses being recognised as a separate component of equity. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss, while translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised directly in equity. When an investment is derecognised or determined to be impaired, the cumulative gain or loss previously recorded in equity is recognised in profit or loss. Financial liabilities at fair value through profit or loss Financial liabilities are classified as at fair value through profit or loss ( FVTPL ) where the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading: if it is acquired for the purpose of settling in the near term; or if it is a derivative that is not designated and effective as a hedging instrument. Financial liabilities at a FVTPL are stated at fair value, with any resultant gains or losses recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability. Other financial liabilities Other financial liabilities are subsequently measured at amortised cost using the effective interest rate method, with interest expense recognised in finance charges and fair value movements, on an effective yield basis. The effective interest rate is the rate that accurately discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Financial guarantee contracts Financial guarantee contracts are subsequently measured at the higher of the amount determined in accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets or the amount initially recognised less, when appropriate, cumulative amortisation, recognised in accordance with IAS18 Revenue.

95 Notes to the consolidated annual financial statements (continued) 2. Significant accounting policies (continued) Financial instruments (continued) Put option A contract that contains an obligation for the Group to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability and is accounted for at the present value of the redemption amount. On initial recognition its fair value is reclassified directly from equity. Subsequent changes in the liability are included in profit or loss. On expiry or exercise of the option the carrying value of the liability is reclassified directly to equity. Cash and cash equivalents Cash and cash equivalents are measured at amortised cost. This comprise cash on hand, deposits held on call and term deposits with an initial maturity of less than three months when entered into. For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents defined above, net of credit facilities utilised. Capital and money market transactions New bonds and commercial paper bills issued are subsequently measured at amortised cost using the effective interest rate method. Bonds issued where Telkom is a buyer and seller of last resort are carried at fair value. The Group does not actively trade in bonds. Derecognition A financial instrument or a portion of a financial instrument will be derecognised and a gain or loss recognised when the Group s contractual rights expire, financial assets are transferred or financial liabilities are extinguished. On derecognition of a financial asset or liability, the difference between the consideration and the carrying amount on the settlement date is included in finance charges and fair value movements for the year. For available-forsale assets, the fair value adjustment relating to prior revaluations of assets is transferred from equity and recognised in finance charges and fair value movements for the year. Bonds and commercial paper bills are derecognised when the obligation specified in the contract is discharged. The difference between the carrying value of the bond and the amount paid to extinguish the obligation is included in finance charges and fair value movements for the year. Impairment of financial assets At each balance sheet date an assessment is made of whether there are any indicators of impairment of a financial asset or a group of financial assets based on observable data about one or more loss events that occurred after the initial recognition of the asset or the group of assets. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. The recoverable amount of financial assets carries at amortised cost is calculated as the present value of expected future cash flows discounted at the original effective interest rate of the asset. If, in a subsequent period, the amount of the impairment loss for financial assets decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed except for those financial assets classified as available-for-sale and carried at cost that are not reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Reversals in respect of equity instruments classified as available-for-sale are not recognised. Reversals of impairment losses on debt instruments classified as available-for-sale are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised through the income statement. Foreign currencies Each entity within the Group determines its functional currency. The Group s presentation currency is the South African Rand ( ZAR ). Transactions denominated in foreign currencies are measured at the rate of exchange at transaction date. Monetary items denominated in foreign currencies are remeasured at the rate of exchange at settlement date or balance sheet date whichever occurs first. Exchange differences on the settlement or translation of monetary assets and liabilities are included in finance charges and fair value movements in the period in which they arise. The annual financial statements of foreign operations are translated into South African Rand, the Group s presentation currency, for incorporation into the consolidated annual financial statements. Assets and liabilities are translated at the foreign exchange rates ruling at the balance sheet date. Income, expenditure and cash flow items are measured at the actual foreign exchange rate or average foreign exchange rates for the period. All resulting unrealised exchange differences are classified as equity. On disposal, the cumulative amounts of unrealised exchange differences that have been deferred are recognised in the consolidated income statement as part of the gain or loss on disposal. All gains and losses on the translation of equity loans to foreign operations that are intended to be permanent whether they are denominated in one of the entities functional currencies or in a third currency, are recognised in equity. Goodwill and intangible assets arising on the acquisition of a foreign operation are treated as assets of the foreign operation and translated at the foreign exchange rates ruling at balance sheet date. Treasury shares Where the Group acquires, or in substance acquires, Telkom shares, such shares are measured at cost and disclosed as a reduction of equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group s own equity instruments. Such shares are not remeasured for changes in fair value. Telkom Annual Report

96 Notes to the consolidated annual financial statements (continued) Significant accounting policies (continued) Insurance contracts Premiums written comprise the premiums on insurance contracts entered into during the year, irrespective of whether they relate in whole or in part to a later accounting period. Premiums are disclosed gross of commission to intermediaries and exclude Value Added Tax. Premiums written include adjustments to premiums written in prior accounting periods. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance business assumed. The net earned portion of premiums received is recognised as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period, based on the pattern of risks underwritten. Outward reinsurance premiums are recognised as an expense in accordance with the pattern of indemnity received. The provision for unearned premiums comprises the proportion of premiums written which is estimated to be earned in subsequent financial years, computed separately for each insurance contract using a time proportionate basis or another suitable basis for uneven risk contracts. Claims incurred consist of claims and claims handling expenses paid during the financial year together with the movement in the provision for outstanding claims. Claims outstanding comprise provisions for the Group s estimate of the ultimate cost of settling all claims incurred but unpaid at the balance sheet date whether reported or not, and an appropriate risk margin. A reserve in equity is made for the full amount of the contingency reserve as required by the regulatory authorities in South Africa. Transfers to and from this reserve are treated as appropriations of retained earnings. Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. All other leases are classified as operating leases. Where the Group enters into a service agreement as a supplier or a customer that depends on the use of a specific asset, and conveys the right to control the use of the specific asset, the arrangement is assessed to determine whether it contains a lease. Once it has been concluded that an arrangement contains a lease, it is assessed against the criteria in IAS17 to determine if the arrangement should be recognised as a finance lease or operating lease. The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification unless it is impracticable to do so. Lessee Operating lease payments are recognised in the income statement on a straight-line basis over the lease term. Assets acquired in terms of finance leases are capitalised at the lower of fair value or the present value of the minimum lease payments at inception of the lease and depreciated over the lesser of the useful life of the asset or the lease term. The capital element of future obligations under the leases is included as a liability in the balance sheet. Lease finance costs are amortised in the income statement over the lease term using a constant periodic rate of interest. Where a sale and leaseback transaction results in a finance lease, any excess of sale proceeds over the carrying amount is deferred and recognised in the income statement over the term of the lease. Lessor Operating lease revenue is recognised in the income statement on a straight-line basis over the lease term. Assets held under a finance lease are recognised in the balance sheet and presented as a receivable at an amount equal to the net investment in the lease. The recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the net investment in the finance lease. Employee benefits Post-employment benefits The Group provides defined benefit and defined contribution plans for the benefit of employees. These plans are funded by the employees and the Group, taking into account recommendations of the independent actuaries. The post-retirement telephone rebate liability is unfunded. Defined contribution plans The Group s funding of the defined contribution plans is charged to employee expenses in the same year as the related service is provided. Defined benefit plans The Group provides defined benefit plans for pension, retirement, post-retirement medical aid benefits and telephone rebates to qualifying employees. The Group s net obligation in respect of defined benefits is calculated separately for each plan by estimating the amount of future benefits earned in return for services rendered. The amount recognised in the balance sheet represents the present value of the defined benefit obligations, calculated by using the projected unit credit method, as adjusted for unrecognised actuarial gains and losses, unrecognised past service costs and reduced by the fair value of the related plan assets. The amount of any surplus recognised and reflected as deferred expenses is limited to unrecognised actuarial losses and past service costs plus the present value of available refunds and reductions in future contributions to the plan. To the extent that there is uncertainty as to the entitlement to the surplus, no asset is recognised. No gain is recognised solely as a result of an actuarial loss or past service cost in the current period and no loss is recognised solely as a result of an actuarial gain or past service cost in the current period. Actuarial gains and losses are recognised as employee expenses when the cumulative unrecognised gains and losses for each individual plan exceed 10% of the greater of the present value of the Group s obligation and the fair value of plan assets at the beginning of the year. These gains or losses are amortised on a straight-line basis over ten years for all the defined benefit plans, except gains or losses related to the pensioners in the Telkom Retirement Fund or unless the standard required faster recognition. For the Telkom Retirement Fund pensioners, the cumulative unrecognised actuarial gains and losses in excess of the 10% corridor at the beginning of the year are recognised immediately.

97 Notes to the consolidated annual financial statements (continued) 2. Significant accounting policies (continued) Employee benefits (continued) Defined benefit plans (continued) Past service costs are recognised immediately to the extent that the benefits are vested, otherwise they are recognised on a straight-line basis over the average period the benefits become vested. Leave benefits Annual leave is provided for over the period that the leave accrues and is subject to a cap of 22 days. Workforce reduction Workforce reduction expenses are payable when employment is terminated before the normal retirement age or when an employee accepts voluntary redundancy in exchange for benefits. Workforce reduction benefits are recognised when the entity is demonstrably committed and it is probable that the expenses will be incurred. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits is based on the number of employees expected to accept the offer. Deferred bonus incentives Employees of the wholly owned subsidiaries of Vodacom, including executive directors, are eligible for compensation benefits in the form of a Deferred Bonus Incentive Scheme. The benefit is recorded at the present value of the expected future cash outflows. Share-based compensation The grants of equity instruments, made to employees in terms of the Telkom Conditional Share Plan, are classified as equity-settled share-based payment transactions. The expense relating to the services rendered by the employees, and the corresponding increase in equity, is measured at the fair value of the equity instruments at their date of grant based on the market price at grant date, adjusted for the lack of entitlement to dividends during the vesting period. This compensation cost is recognised over the vesting period, based on the best available estimate at each balance sheet date of the number of equity instruments that are expected to vest. Short-term employee benefits The cost of all short-term employee benefits is recognised during the year the employees render services, unless the Group uses the services of employees in the construction of an asset and the benefits received meet the recognition criteria of an asset, at which stage it is included as part of the related property, plant and equipment or intangible asset item. Long-term incentive provision The Vodacom Group provides long-term incentives to eligible employees payable on termination or retirement. The Group s liability is based on an actuarial valuation. Actuarial gains and losses are recognised as employee expenses. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. Segmental reporting As of the beginning of the year the Group identified a new segment called Other, and is now managed in three business segments, which form the primary segment reporting basis: Fixed-line, Mobile and Other. The Other business segment includes newly acquired Multi-Links Telecommunications Limited and Africa Online Limited, as well as the Telkom Media Group. It also includes TDS Directory Operations Group and Swiftnet (Proprietary) Limited, which were previously included in the Fixed-line segment. The corporate information has also been updated to reflect the above changes. The Group s three segments operate in South Africa, and other African countries. The geographical location of the Group s customers has been identified as the secondary basis for segment reporting. The Fixed-line business segment provides local telephony and data, domestic and international long-distance services as well as leased lines, data transmission and internet access. The Mobile business segment provides mobile telephony services as well as the sale of mobile equipment. The Other business segment provides directory services, fixed, mobile, data and international telecommunication services throughout other African countries. Inter-segment transactions are accounted for in the same way as transactions to third parties at current market prices. Telkom Annual Report

98 Notes to the consolidated annual financial statements (continued) 3. Revenue 3.1 Total revenue 48,260 52,157 56,865 Operating revenue 47,625 51,619 56,285 Other income (excluding profit on disposal of property, plant and equipment, intangible assets and investments, refer to note 4) Investment income (refer to note 6) Operating revenue 47,625 51,619 56,285 Fixed-line 31,832 32,345 32,572 Mobile 17,021 20,573 24,089 Other ,993 Eliminations (2,180) (2,278) (2,369) Fixed-line 31,832 32,345 32,572 Subscriptions, connections and other usage 5,803 6,286 6,330 Traffic 17,563 16,740 15,950 Domestic (local and long distance) 8,915 7,563 6,328 Fixed-to-mobile 7,647 7,646 7,557 International (outgoing) 1, Subscription based calling plans* 543 1,079 Interconnection 1,654 1,639 1,757 Data 6,674 7,489 8,308 Sundry revenue Mobile 17,021 20,573 24,089 Airtime and access 10,043 11,854 13,548 Data revenue 1,019 1,671 2,501 Interconnect revenue 3,348 3,918 4,443 Equipment sales 1,993 2,350 2,526 International airtime Other *The Group has reclassified calling plans from domestic traffic into a separate revenue line item to disclose revenue earned from subscription based calling plans. Amounts for the year ended March 31, 2006 were not restated as they were considered to be immaterial. Fixed-line revenue has been restated as a result of changes in the segment structure Rm Rm Rm 4. Other income Other income (included in Total revenue, refer to note 3) Interest received from trade receivables Sundry income Profit on disposal of property, plant and equipment and intangible assets Profit on disposal of investment and subsidiary The increase in profit on disposal of property, plant and equipment and intangible assets is due to the increased volumes and values on the sale of Telkom properties in alignment with Telkom s strategy of disposing of non-core assets.

99 Notes to the consolidated annual financial statements (continued) 5. Operating expenses Operating expenses comprise: Rm Rm Rm 5.1 Employee expenses 7,489 8,454 9,220 Salaries and wages 5,566 6,362 7,144 Medical aid contributions Retirement contributions Post-retirement pension and retirement fund (refer to note 29) (58) 33 5 Current service cost Interest cost Expected return on plan assets (454) (508) (713) Actuarial loss/(gain) 78 (136) (16) Settlement loss 21 (2) Asset limitation (50) Post-retirement medical aid (refer to note 28 and 29) Current service cost Interest cost Expected return on plan asset (188) (257) Actuarial loss Settlement loss 7 Curtailment gain (6) Telephone rebates (refer to note 28 and 29) Current service cost Interest cost Past service cost 76 2 Actuarial loss 5 Share-based compensation expense (refer to note 23) Other benefits* 1,288 1,299 1,015 Employee expenses capitalised (620) (696) (786) *Other benefits Other benefits include skills development, annual leave, performance incentive and service bonuses. 5.2 Payments to other operators 6,826 7,590 9,169 Payments to other network operators consist of expenses in respect of interconnection with other network operators. Telkom Annual Report Selling, general and administrative expenses 10,273 12,902 14,409 Selling and administrative expenses 7,240 9,248 10,352 Maintenance 1,928 2,286 2,508 Marketing 899 1,215 1,249 Bad debts (refer to note 18)

100 Notes to the consolidated annual financial statements (continued) 5. Operating expenses (continued) 5.4 Service fees 2,114 2,291 2,571 Facilities and property management 1,110 1,142 1,228 Consultancy services Security and other Auditors remuneration Audit services Company auditors Current year Prior year underprovision Other auditors current year Audit related services 9 1 Company auditors current year 6 Other auditors 3 1 Other services 3 1 The increase in security costs is mainly attributable to Telkom s drive to minimise cable theft Rm Rm Rm 5.5 Operating leases Land and buildings Transmission and data lines Equipment Vehicles Depreciation, amortisation, impairment and write-offs 5,876 5,315 6,130 Depreciation of property, plant and equipment (refer to note 10) 5,154 4,483 4,855 Amortisation of intangible assets (refer to note 11) Impairment of property, plant and equipment and intangible assets (refer to note 10 and 11) Reversal of impairment of property, plant and equipment (refer to note 10) (26) Write-offs of property, plant and equipment and intangible assets (refer to note 10 and 11) In recognition of the changed usage patterns of certain items of property, plant and equipment and intangible assets, the Group reviewed their remaining useful lives as at March 31. The assets affected were certain items included in Network equipment, Support equipment, Furniture and office equipment, Data processing equipment and software and Intangible assets. The revised estimated useful lives of these assets as set out below, resulted in a decrease of the current year depreciation and amortisation charges of R198 million (2007: R983 million).

101 Notes to the consolidated annual financial statements (continued) Previous life Years Revised life Years 5. Operating expenses (continued) 5.6 Depreciation, amortisation, impairment and write-offs (continued) Property, plant and equipment Network equipment Switching equipment Other Support equipment Furniture and office equipment Data processing equipment and software Intangible assets Subscriber bases Software Rm Rm Rm 6. Investment income Interest received Dividends received from investments 50 3 Included in investment income is an amount of R169 million (2007: R222 million; 2006: R347 million) which relates to interest earned from financial assets not measured at fair value through profit or loss. 7. Finance charges and fair value movements 1,223 1,125 1,803 Finance charges on interest-bearing debt 1,346 1,327 1,885 Local debt 1,506 1,488 2,041 Foreign debt 9 19 Less: Finance costs capitalised (169) (161) (175) Foreign exchange gains and losses and fair value movement (123) (202) (82) Foreign exchange losses Fair value adjustments on derivative instruments (170) (448) (196) Capitalisation rate 13.91% 14.77% 12.60% During the year gains of R8 million (2007: RNil; 2006: RNil) from available-for-sale instruments were recognised directly in equity. Included in finance charges is an amount of R1,831 million (2007: R1,321 million; 2006: R1,341 million) which relates to interest paid on financial liabilities not measured at fair value through profit or loss. Telkom Annual Report

102 Notes to the consolidated annual financial statements (continued) 8. Taxation 4,523 4,731 4,704 South African normal company taxation 3,763 3,528 3,756 Current tax 3,754 3,564 3,764 Underprovision/(overprovision) for prior year 9 (36) (8) Deferred taxation Temporary differences normal company taxation Temporary difference Secondary Taxation on Companies ( STC ) tax credits utilised/(raised) 51 (69) 190 Change in tax rate (59) (Overprovision)/underprovision for prior year (107) 1 (53) Secondary Taxation on Companies Foreign taxation The net deferred taxation expense results mainly from the extension of useful lives, offset slightly by an increase in the STC tax credits. The STC expense was provided for at a rate of 10% (12.5% before October 1, 2007) on the amount by which dividends declared exceeded dividends received. Deferred tax expense relating to STC credits are provided for at a rate of 10% Rm Rm Rm Reconciliation of taxation rate % % % Effective rate South African normal rate of taxation Adjusted for: Change in tax rate (0.5) Exempt income (1.3) (0.2) (0.5) Disallowable expenditure Tax losses not utilised 0.6 (0.7) STC tax credits utilised/(raised) 0.4 (0.3) 1.5 STC tax charge Capital gains tax 0.8 Net overprovision for prior year (1.1) (0.5) (0.5) Utilisation of assessed loss (0.1) Where required, provisions have been made or adjusted for anticipated obligations related to various ongoing investigations by tax authorities on indirect taxes. The provisions made include estimates of anticipated interest and penalties where appropriate. As of March 31, 2008, the Group has accrued for tax obligations in the amount of RNil (2007: RNil; 2006: R199 million). These amounts represent what management believes will be the probable outcome of such disputes for all tax years for which additional taxes can be assessed. 208

103 Notes to the consolidated annual financial statements (continued) Earnings per share Basic earnings per share (cents) 1, , ,565.0 The calculation of earnings per share is based on profit attributable to equity holders of Telkom for the year of R7,975 million (2007: R8,646 million; 2006: R9,189 million) and 509,595,092 (2007: 514,341,284; 2006: 526,271,095) weighted average number of ordinary shares in issue. Diluted earnings per share (cents) 1, , ,546.9 The calculation of diluted earnings per share is based on earnings for the year of R7,975 million (2007: R8,646 million; 2006: R9,189 million) and 515,541,968 diluted weighted average number of ordinary shares (2007: 515,763,581; 2006: 529,152,320). The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Headline earnings per share (cents)* 1, , ,634.8 The calculation of headline earnings per share is based on headline earnings of R8,331 million (2007: R8,799 million; 2006: R9,097 million) and 509,595,092 (2007: 514,341,284; 2006: 526,271,095) weighted average number of ordinary shares in issue. Diluted headline earnings per share (cents)* 1, , ,616.0 The calculation of diluted headline earnings per share is based on headline earnings of R8,331 million (2007: R8,799 million; 2006: R9,097 million) and 515,541,968 (2007: 515,763,581; 2006: 529,152,320) diluted weighted average number of ordinary shares in issue. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Reconciliation of weighted average number of ordinary shares: Ordinary shares in issue (refer to note 21) 557,031, ,944, ,855,530 Weighted average number of shares bought back (7,211,710) (7,442,253) (1,594,241) Weighted average number of treasury shares (23,549,016) (23,161,364) (21,666,197) Weighted average number of shares outstanding 526,271, ,341, ,595,092 *The disclosure of headline earnings is a requirement of the JSE Limited and is not a recognised measure under IFRS. It has been calculated in accordance with the South African Institute of Chartered Accountants circular issued in this regard. The effect of the increase in the interest expense as a result of the increase in borrowings is a reduction in the basic earnings per share of 63.4 cents and a reduction in headline earnings per share of 62.7 cents. Telkom Annual Report

104 Notes to the consolidated annual financial statements (continued) Gross* Rm Net Rm 9. Earnings per share (continued) 2008 Reconciliation between earnings and headline earnings: Earnings as reported 7,975 Profit on disposal of investments (Available-for-sale) (4) (3) Profit on disposal of property, plant and equipment and intangible assets (147) (104) Impairment loss on property, plant and equipment and intangible assets Write-offs of property, plant and equipment and intangible assets Headline earnings 8, Reconciliation between earnings and headline earnings: Earnings as reported 8,646 Profit on disposal of investments (Available-for-sale) (52) (37) Profit on disposal of property, plant and equipment and intangible assets (29) (21) Impairment loss on property, plant and equipment and intangible assets 12 9 Write-offs of property, plant and equipment and intangible assets Headline earnings 8, Reconciliation between earnings and headline earnings: Earnings as reported 9,189 Profit on disposal of investments (Available-for-sale) (163) (116) Profit on disposal of property, plant and equipment and intangible assets (79) (56) Reversal of impairment loss on property, plant and equipment and intangible assets (26) (18) Write-offs of property, plant and equipment and intangible assets Acquisition of subsidiary (35) (35) Headline earnings 9,097 *These are the gross amounts, before deducting taxation and minority interests Reconciliation of diluted weighted average number of ordinary shares: Weighted average number of share outstanding 526,271, ,341, ,595,092 Expected future vesting of shares 2,881,225 1,422,297 5,946, Dilluted weighted average number of shares outstanding 529,152, ,763, ,541,968 Dividend per share (cents) ,100.0 The calculation of dividend per share is based on dividends of R5,627 million (2007: R4,678 million; 2006: R4,801 million) declared on June 8, 2007 and 511,513,239 (2007: 519,711,238; 2006: 533,465,573) number of ordinary shares outstanding on the date of dividend declaration. The reduction in the number of shares represents the number of treasury shares held on date of payment.

105 Notes to the consolidated annual financial statements (continued) 10. Property, plant and equipment Accumulated Carrying Accumulated Carrying Accumulated Carrying Cost depreciation value Cost depreciation value Cost depreciation value Rm Rm Rm Rm Rm Rm Rm Rm Rm Freehold land and buildings 4,510 (1,811) 2,699 4,594 (1,837) 2,757 4,931 (2,010) 2,921 Leasehold buildings 940 (322) (362) 564 1,052 (418) 634 Network equipment 59,418 (30,477) 28,941 63,003 (31,820) 31,183 69,572 (35,214) 34,358 Support equipment 3,740 (2,419) 1,321 4,045 (2,436) 1,609 4,355 (2,635) 1,720 Furniture and office equipment 469 (335) (366) (377) 191 Data processing equipment and software 5,612 (3,530) 2,082 5,836 (3,707) 2,129 6,279 (3,904) 2,375 Under construction 1,320 1,320 2,536 2,536 4,200 4,200 Other 552 (393) (554) 306 1,046 (630) ,561 (39,287) 37,274 82,336 (41,082) 41,254 92,003 (45,188) 46,815 A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build program with focus on Next Generation Network technologies has resulted in an increase in property, plant and equipment additions which is expected to continue over the next few years. Fully depreciated assets with a cost of R498 million (2007: R1,225 million; 2006: R3,724 million) were derecognised in the 2008 financial year. This has reduced both the cost price and accumulated depreciation of property, plant and equipment. Property, plant and equipment with a carrying value of R681 million (2007: R574 million; 2006: R624 million) are pledged as security. Details of the loans are disclosed in note 27. The carrying amounts of property, plant and equipment can be reconciled as follows: Impair- Carrying Foreign ment, Carrying value at Business currency write-offs value at beginning combi- trans- and Depre- end of of year Additions nations Transfers lation reversals Disposals ciation year Rm Rm Rm Rm Rm Rm Rm Rm Rm 2008 Freehold land and buildings 2, (3) (8) (176) 2,921 Leasehold buildings (67) (1) (57) 634 Network equipment 31,183 5, , (136) (107) (3,726) 34,358 Support equipment 1, (8) (317) 1,720 Furniture and office equipment (8) (1) (53) 191 Data processing equipment and software 2, (19) (2) (445) 2,375 Under construction 2,536 3, (1,737) 2 (152) 4,200 Other (2) (3) (81) 416 Telkom Annual Report ,254 10, (99) 294 (395) (122) (4,855) 46,815

106 Notes to the consolidated annual financial statements (continued) 10. Property, plant and equipment (continued) 2007 Impair- Carrying Foreign ment, Carrying value at Business currency write-offs value at beginning combi- trans- and Depre- end of of year Additions nations Transfers lation reversals Disposals ciation year Rm Rm Rm Rm Rm Rm Rm Rm Rm Freehold land and buildings 2, (1) (169) 2,757 Leasehold buildings (14) (41) 564 Network equipment 28,941 5, (199) (270) (3,533) 31,183 Support equipment 1, (15) (250) 1,609 Furniture and office equipment (27) 170 Data processing equipment and software 2, (36) 8 (10) (2) (391) 2,129 Under construction 1,320 2,165 (912) (37) 2,536 Other (1) (3) (72) ,274 8, (245) (290) (4,483) 41, Freehold land and buildings 2, (22) (21) (202) 2,699 Leasehold buildings (1) (74) 618 Network equipment 28,336 2,622 2,228 (122) (49) (21) (4,053) 28,941 Support equipment 1, (1) (6) (5) (258) 1,321 Furniture and office equipment (44) 134 Data processing equipment and software 2, (2) (10) (1) (475) 2,082 Under construction 1,084 2,933 (2,622) (75) 1,320 Other (29) (1) (8) (48) ,448 6, (126) (162) (56) (5,154) 37, Full details of land and buildings are available for inspection at the registered offices of the Group. In March 2006 the Group started a process of determining whether an asset which incorporates both a tangible and an intangible element, should be recognised as tangible or intangible assets, based on management judgement and on facts available and the significance of each element to the total value of the asset. This ongoing process has resulted in further assets with a carrying value to the net amount of R99 million (2007: R77 million ; 2006: R13 million) being reclassified between intangible assets and property, plant and equipment in the current year. The Group does not have temporary idle property, plant and equipment. During the current year, the Group recognised an impairment loss relating to Telkom Media assets. The recoverable amount for certain items of property, plant and equipment and intangible assets were estimated, and an impairment loss of R217 million was recognised in order to reduce the carrying amount of those assets to their recoverable amount. The impairment has been included in impairment, write-offs and reversals.

107 Notes to the consolidated annual financial statements (continued) 11. Intangible assets Goodwill ,255 3,255 Trademarks, copyrights and other 685 (472) (521) 240 1,127 (633) 494 Licences 155 (95) (116) (140) 171 Software 5,607 (3,338) 2,269 6,720 (3,737) 2,983 8,106 (4,298) 3,808 Under construction 1,063 1,063 1,109 1, ,815 (3,905) 3,910 9,485 (4,374) 5,111 13,539 (5,071) 8,468 The carrying amounts of intangible assets can be reconciled as follows: Carrying Foreign Impair- Carrying value at Business currency ment value at beginning combi- trans- and Dis- Amorti- end of of year Additions nations Transfers lation write-offs posals sation year Rm Rm Rm Rm Rm Rm Rm Rm Rm 2008 Goodwill , (12) 3,255 Trademarks, copyrights and other (105) 494 Licences (3) (15) 171 Software 2, (10) (626) 3,808 Under construction 1, (614) (109) Accumulated Carrying Accumulated Carrying Accumulated Carrying Cost amortisation value Cost amortisation value Cost amortisation value Rm Rm Rm Rm Rm Rm Rm Rm Rm 5,111 1,791 1, (134) (746) 8,468 Goodwill Trademarks, copyrights and other (50) 240 Licences (10) 106 Software 2, (4) (476) 2,983 Under construction 1, (636) (47) 1,109 3,910 1, (77) 24 (51) (536) 5, Goodwill (1) 305 Trademarks, copyrights and other (81) 213 Licences 64 1 (1) (4) 60 Software 1, (2) (19) (475) 2,269 Under construction (816) 1,063 Telkom Annual Report ,182 1, (13) (4) (19) (560) 3,910 Intangible assets that are material to the Group consist of Software and Goodwill. The average remaining amortisation period for Software is between 2 and 10 years. Telkom Goodwill has been allocated for impairment testing purposes to twelve cash-generating units of which one in South Africa, one in Nigeria being Multi-Links Telecommunications Limited and ten being Africa Online Limited in Cote d Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia, operations (Mauritius) and Zimbabwe.

108 Notes to the consolidated annual financial statements (continued) 11. Intangible assets (continued) Nigeria The carrying amount of goodwill is R2,072 million. The recoverable amount for Multi-Links Telecommunications Limited ( Multi-Links ) has been determined on the basis of a value in use calculation. The value in use calculation uses cash flow projections and a discount rate of 18.43%. It was concluded that Multi-Links is not impaired. The valuation was based on cash flow projections based on financial budgets approved by management covering a ten year period and a 1% terminal growth rate was used. A ten year period was used as the expected growth rates are in excess of the long-term average growth rates beyond a five year period. Kenya The carrying amount of goodwill is R155 million. The recoverable amounts of goodwill relating to Africa Online Limited have been determined on the basis of value in use calculations. Goodwill was only tested against the three cash-generating units namely; Kenya, Tanzania and Ghana, which amongst them share 82% of the total goodwill per the allocation. The value in use calculations use cash flow projections and a discount at a rate of 11.59% in US Dollar terms. It was determined that goodwill associated with two cash-generating units; Tanzania and Ghana was impaired. The value in use calculations use cash flow projections based on financial budgets covering a three year period and a terminal growth rate of 0% was used. By the Group s 50% joint venture, Vodacom Goodwill has been allocated for impairment testing purposes to six cash-generating units of which four are in South Africa, one in the Democratic Republic of the Congo and one in Tanzania. South Africa The carrying amount of goodwill is R1,739 million (Group share: R870 million). The recoverable amounts of goodwill relating to Vodacom Service Provider Company (Proprietary) Limited, Smartphone SP (Proprietary) Limited, Smartcom (Proprietary) Limited and Cointel VAS (Proprietary) Limited have been determined on the basis of value in use calculations. These companies operate in the same economic environment for which the same key assumptions were used. These value in use calculations use cash flow projections based on financial budgets approved by management covering a ten year period and discount rates of between 12.0% and 15.0% in South African Rand terms. The terminal growth rate applicable is between 4.0% and 6.0%. Management believes that any reasonable change in any of these key assumptions would not cause the aggregate carrying amount of these companies to exceed the aggregate recoverable amount of these units. 214 Democratic Republic of Congo The carrying amount of goodwill is R148 million (Group share: R74 million). The recoverable amount of this cash-generating unit was based on a value in use calculation for Vodacom Congo (RDC) s.p.r.l. The calculation uses cash flow projections based on financial budgets approved by management covering a ten year period and a discount rate which ranged between 16.0% and 19.0% in US Dollar terms. Cash flows beyond this period have been extrapolated using annual nominal growth rates which ranged between 2.0% and 5.0%. A ten year period is used where expected growth rates are in excess of the long-term average growth rates beyond an initial five year period, for the markets in which they operate. Management believes that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount. Key assumptions used in the testing of goodwill for impairment: Applicable to all cash-generating units Expected customer base: The basis for determining value(s) assigned to key assumptions is based on the closing customer base in the period immediately preceding the budget period and increased for expected growth. The value assigned to key assumptions reflects past experience, and has an element of potential growth. The growth is based on market assumptions. Gross Margin: The basis for determining value(s) assigned to key assumptions is based on the average gross margin achieved in the period immediately before the budget period and increased to expected efficiencies. The value assigned reflects past experience and efficiency improvements. Capital expenditure: The basis for determining value(s) assigned to key assumptions is based on the total capital expenditure achieved in the period immediately before the budget period and adjusted for expected network coverage roll out. The value assigned is based on management s expected network coverage roll out. Applicable to all cash-generating units except for the Africa Online cash-generating units ARPU: The basis for determining value(s) assigned to key assumptions is based on past experience and expected growth which is based on market forces and external sources of information. Applicable to all non South African cash-generating units Exchange rates: The basis for determining value(s) assigned to key assumptions is based on the average market forward exchange rate over the budget period in respect of the ZAR/USD. The value assigned to the key assumption is consistent with external sources of information.

109 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management Exposure to continuously changing market conditions has made management of financial risk critical for the Group. Treasury policies, risk limits and control procedures are continuously monitored by the Board of Directors through its audit and risk management committee. The Group holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage currency and interest rate risks. In addition, financial instruments for example trade receivables and payables arise directly from the Group s operations. The Group finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The Group uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are principally interest rate swaps, currency swaps and forward exchange contracts. The Group does not speculate in derivative instruments. The table below sets out the Group s classification of financial assets and liabilities At fair value Financial through profit liabilities or loss at Total held for amortised Held-to- Available- Loans and carrying Fair trading cost maturity for-sale receivables value value Notes Rm Rm Rm Rm Rm Rm Rm 2008 Classes of financial instruments per Balance Sheet Assets 1, ,783 12,201 12,201 Investments 13 1, ,499 1,499 Trade and other receivables* 18 8,582 8,582 8,582 Other financial assets Interest rate swaps Forward exchange contracts Other financial assets Finance lease receivables Cash and cash equivalents 20 1,134 1,134 1,134 Liabilities (1,290) (25,846) (27,136) (27,672) Interest-bearing debt 27 (15,733) (15,733) (16,269) Trade and other payables 30 (8,771) (8,771) (8,771) Other financial liabilities 19 (1,290) (1,290) (1,290) Put option (Multi-Links) 19 (919) (919) (919) Put option (Vodacom DRC) 19 (198) (198) (198) Forward exchange contracts 19 (173) (173) (173) Telkom Annual Report 2008 Credit facilities utilised 20 (1,342) (1,342) (1,342) 215

110 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 2007 At fair value Financial through profit liabilities or loss at Total held for amortised Held-to- Available- Loans and carrying Fair trading cost maturity for-sale receivables value value Notes Rm Rm Rm Rm Rm Rm Rm Classes of financial instruments per Balance Sheet Assets 1, ,861 9,762 9,762 Investments 13 1, ,461 1,461 Trade and other receivables* 18 7,047 7,047 7,047 Other financial assets Bills of exchange Interest rate swaps Forward exchange contracts Finance lease receivables Cash and cash equivalents Liabilities (327) (17,944) (18,271) (19,661) Interest-bearing debt 27 (98) (10,266) (10,364) (11,754) Trade and other payables 30 (7,237) (7,237) (7,237) Other financial liabilities 19 (229) (229) (229) Put option (Vodacom DRC) 19 (125) (125) (125) Interest rate swaps 19 (26) (26) (26) Forward exchange contracts 19 (42) (42) (42) Other financial liabilities 19 (36) (36) (36) Credit facilities utilised 20 (441) (441) (441) 2006 Classes of financial instruments per Balance Sheet Assets 3,149 11,269 14,418 14,418 Investments 13 2, ,963 2,963 Trade and other receivables* 18 6,232 6,232 6,232 Other financial assets Bills of exchange Interest rate swaps Forward exchange contracts Cash and cash equivalents 20 4,948 4,948 4,948 Liabilities (343) (17,811) (18,154) (20,180) Interest-bearing debt 27 (108) (11,015) (11,123) (13,149) Trade and other payables 30 (6,103) (6,103) (6,103) Other financial liabilities 19 (235) (235) (235) Interest rate swaps 19 (105) (105) (105) Forward exchange contracts 19 (130) (130) (130) Credit facilities utilised 20 (693) (693) (693) *Trade and other receivables are disclosed net of prepayments of R404 million (2007: R256 million; 2006: R167 million).

111 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.1 Fair value of financial instruments Fair value of all financial instruments noted in the balance sheet approximates carrying value except as disclosed below. The estimated net fair values as at March 31, 2008, have been determined using available market information and appropriate valuation methodologies as outlined below. This value is not necessarily indicative of the amounts that the Group could realise in the normal course of business. Derivates are recognised at fair value. The fair value of derivatives approximate their carrying amounts. The fair value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their carrying amount due to the short-term maturities of these instruments. The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future payments discounted at market interest rates. The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is used. These amounts reflect the approximate values of the net derivative position at the balance sheet date. The fair values of listed investments are based on quoted market prices Interest rate risk management Interest rate risk arises from the repricing of the Group s forward cover and floating rate debt as well as incremental funding or new borrowings and the refinancing of existing borrowings. The Group s policy is to manage interest cost through the utilisation of a mix of fixed and floating rate debt. In order to manage this mix in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated peak additional borrowings, the Group makes use of interest rate derivatives as approved in terms of the Group policy limits. Fixed rate debt represents approximately 51.88% (2007: 90.37%; 2006: 92.04%) of the total debt. There were no material changes in the policies and processes for managing and measuring risk in the 2008 financial year. The table below summarises the interest rate swaps outstanding as at March 31: Notional Weighted Average amount average maturity Currency Rm coupon rate 2008 Interest rate swaps outstanding Receive fixed <1 year ZAR % 1 5 years ZAR % >5 years ZAR 2007 Interest rate swaps outstanding Pay fixed < 1 year ZAR 1, % Receive fixed 1 5 years ZAR % >5 years ZAR % Telkom Annual Report Interest rate swaps outstanding Pay fixed < 1 year ZAR 1, % Receive fixed 1 5 years ZAR % >5 years ZAR % 217 Pay fixed The floating rate is based on the three month JIBAR, and is settled quarterly in arrears. The interest rate swaps are used to manage interest rate risk on debt instruments. Receive fixed The Group swapped its fixed rate for a floating rate linked to the BA (Banker s Acceptance) rate plus a margin of between 2% and 2.25%.

112 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.3 Credit risk management Credit risk arises from derivative contracts entered into with financial institutions with a range of A1 or better. The Group is not exposed to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Group from counterparties is a net favourable position of R438 million (2007:R144 million; 2006: R158 million). No collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Group limits the exposure to any counterparty and exposures are monitored daily. The Group expects that all counterparties will meet their obligations. With respect to credit risk arising from other financial assets of the Group, which comprises held-to-maturity investments, financial assets held at fair value through profit or loss, loans and receivables and available-for-sale assets, the Group s exposure to credit risk arises from a potential default by counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Group s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management seeks to reduce the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counter party failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles. Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where appropriate. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected future cash flows. The Group has provided a financial guarantee to Africa Online Limited for bank loans. At March 31, 2008 there was R23 million (2007: RNil) outstanding. For Vodacom s exposure to guarantees refer to note 36. Telkom guarantees a certain portion of employees s housing loans. The amount guaranteed differs depending on facts such as employment period and salary rates. When an employee leaves the employment of Telkom, any housing debt guaranteed by Telkom is settled before any pension payout can be made to the employee. There is no provsision outstanding in respect of these contingencies. The fair value of the guarantee at March 31, 2008 was RNil (2007: RNil; 2006: RNil). There were no material changes in the exposure to credit risk and its objectives, policies and processes for managing and measuring the risk during the 2008 financial year. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk for trade and other receivables at the reporting date by type of customer was: Carrying amount Rm Rm Rm Business and residential 1,955 1,924 1,824 Global, corporate and wholesale 1,381 1,643 1,875 Government Other customers Fixed-line 3,740 3,926 4,401 Mobile 1,834 2,299 2,880 Other Impairment of trade receivables (290) (235) (290) 218 Subtotal for trade receivables 5,798 6,557 7,695 Other receivables* Investments and loans receivable 2,963 1,461 1,499 Other financial assets ,470 8,767 10,695 The ageing of trade receivables at the reporting date was: Not past due/current 5,342 5,829 6,840 Ageing of past due but not impaired 21 to 60 days to 90 days to 120 days days *Other receivables are disclosed net of prepayments of R404 million (2007: R256 million; 2006: R167 million). 5,798 6,557 7,695

113 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.3 Credit risk management (continued) Rm Rm Rm The ageing in the allowance for the impairment of trade receivables at reporting date was: Fixed-line and Other Current defaulted trade to 60 days to 90 days to 120 days days Mobile The average credit period for March 2008, 2007 and 2006 on sales of goods and services is between 30 and 60 days from date of invoice for the South African operations and between 20 and 75 days from the date of invoice for the non-south African operations. Generally no interest is charged on trade receivables. Mobile operations have provided fully for all receivables over 120 days due for their South African operations and 90 days due for their non-south African operations because historical experience is such that receivables that are due beyond these days are generally not recoverable. Trade receivables of the South African operations due between 60 and 120 days are provided for based on estimated irrecoverable amounts, determined by reference to past default experience. The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 18. Included in the allowance for doubtful debts, for fixed-line are individually impaired receivables with a balance of R32 million (2007: R49 million; 2006: R55 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Group does not hold any collateral over these balances except for Mobile which holds collateral for financial assets past due but not impaired to the value of R1,086 million (2007: R796 million; 2006: R433 million) (Group share: R543 million; 2007: R398 million; 2006: R217 million) Liquidity risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group is exposed to liquidity risk as a result of uncertain trade receivable related to cash flows as well as capital commitments of the Group. Liquidity risk is managed by the Group s various Corporate Finance divisions in accordance with policies and guidelines formulated by the Group s Executive Committees. In terms of its borrowing requirements the Group ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Group maintains a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills. There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring the risk during the 2008 financial year. Telkom Annual Report

114 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.4 Liquidity risk management (continued) The table below analyses the Group s financial liabilities which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table below are the contractual undiscounted cash flows Non-derivative financial liabilities Carrying Contractual > 5 Note amount cash flows months years years years Rm Rm Rm Rm Rm Rm Finance lease liabilities* 27 1,167 2, ,150 Interest-bearing debt (excluding finance leases) 27 14,566 16,672 6,350 4,835 2,733 2,754 Trade and other payables 30 8,771 8,771 8,771 Bank borrowings 20 1,342 1,342 1,342 Derivative financial liabilities Put option (Multi-Links) Put option (Vodacom DRC) Forward exchange contracts Non-derivative financial liabilities 27,136 30,273 16,999 6,048 3,322 3,904 Finance lease liabilities* 27 1,220 2, ,332 Interest-bearing debt (excluding finance leases) 27 9,144 11,329 6, ,551 2,644 Trade and other payables 30 7,237 7,237 7,237 Bank borrowings Derivative financial liabilities Put option (Vodacom DRC) Interest rate swaps Forward exchange contracts Other financial liability ,271 21,660 14, ,136 3, Non-derivative financial liabilities Finance lease liabilities* 27 1,272 2, ,519 Interest-bearing debt (excluding finance leases) 27 9,851 12,415 3,425 4,581 1,792 2,617 Trade and other payables 30 6,103 6,103 6,103 Bank borrowings Derivative financial liabilities Interest rate swaps Forward exchange contracts ,154 22,090 10,568 4,922 2,464 4,136 *For details on minimum lease payments refer to note 37.

115 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.4 Liquidity risk management (continued) Put and call options In terms of various shareholders agreements, put and call options exist for the acquisition of shares in the following companies: Call options Period VM, S.A.R.L call option Four years from August 23, Replaced with a new option for a period of 5 years after April 1, The Somnium Family Trust WBS Holdings (Proprietary) Limited G-Mobile Holdings Limited The Trust granted Vodacom Ventures (Proprietary) Limited a call option to purchase such number of shares in Gogga Tracking Solutions (Proprietary) Limited from the Trust totalling 23% of the issued share capital of the company on the date upon which the option is exercised. The option will lapse after 36 months following the month in which the triggering events, as stipulated in the option agreement, occurs. The option price is specified in the option agreement. Until February 27, 2009, subject to fulfilment of conditions, which will result in the Group holding and beneficially owning in aggregate 25.5% of the total issued ordinary share capital. Irrevocable call option to subscribe for such number of further shares as specified in the agreement. The option was exercised on September 20, Put Options Multi-Links Telecommunications Limited Smartphone SP (Proprietary) Limited Smartcom (Proprietary) Limited The minorities have been granted a put option that requires Telkom to purchase all of the minorities shares. The put option is exercisable within 90 days of the second anniversary of signing of the sale agreement, being May 1, A liability of R919 million has been recognised in this regard and is included in other non-current financial liabilities. R661 million was initially recognised in equity and R258 million subsequent re-measurement through finance charges and fair value movements. This put option was cancelled with the acquisition of the minorities of Smartphone SP (Proprietary) Limited. This put option was cancelled with the acquisition of the minorities of Smartcom (Proprietary) Limited. Congolese Wireless Network s.p.r.l. Maximum 8 years after December 1, The option liability had a value of R397 million (2007: R249 million; 2006: RNil) (Group share: R198 million; 2007: R125 million; 2006: RNil) as at March 31, Except as separately disclosed, none of the above put and call options have any value at any of the periods presented Insurance risk management Vodacom is exposed to insurance risk as a result of its asset base as well as its customer commitments. In terms of its insurance risk profile the company ensures that there is adequate insurance cover through the utilisation of a special purpose insurance vehicle. Telkom Annual Report

116 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.6 Foreign currency exchange rate risk management The Group manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial instruments suitable to the Group s risk exposure. Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Group s operations and liabilities. The Group also enters into forward foreign exchange contracts to economically hedge interest expense and purchase and sale commitments denominated in foreign currencies (primarily United States Dollars and Euros). The purpose of the Group s foreign currency hedging activities is to protect the Group from the risk that the eventual net flows will be adversely affected by changes in exchange rates. There were no material changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and measuring the risk during the 2008 financial year. The following table details the foreign exchange forward contracts outstanding at year end: Foreign contract value Forward value Fair value To buy m Rm Rm 2008 Currency USD 139 1, Euro 252 2, Pound Sterling Other Currency USD 181 1,329 (1) Euro 196 1, Pound Sterling Other (1) 2006 Currency USD 178 1,157 (51) Euro 156 1,235 (46) Pound Sterling (21) Other (1) 4,181 3,538 2,

117 Notes to the consolidated annual financial statements (continued) Foreign contract value Forward value Fair value To sell m Rm Rm 12. Financial instruments and risk management (continued) 12.6 Foreign currency exchange rate risk management (continued) 2008 Currency USD (68) Euro (103) Pound Sterling 5 89 (1) Other (1) 1, Currency USD Euro (5) Pound Sterling Other , Currency USD Euro (3) Pound Sterling Other ,342 Telkom Annual Report

118 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.6 Foreign currency exchange rate risk management (continued) The Group has various monetary assets and liabilities in currencies other than the Group s functional currency. The following table represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Group according to the different foreign currencies. South United African Pound States Rand Euro Sterling Dollar Other Rm Rm Rm Rm Rm 2008 Net foreign currency monetary assets/(liabilities) Functional currency of company operation ZAR 481 (133) 224 (13) USD 8 (17) Naira (446) 2007 Net foreign currency monetary assets/(liabilities) Functional currency of company operation ZAR 475 (166) USD 26 (25) (17) 2006 Net foreign currency monetary assets/(liabilities) Functional currency of company operation ZAR 376 (165) USD (28) (13) 13 Currency swaps There were no currency swaps in place at March 31, 2008, 2007 and Sensitivity analysis Interest rate risk The sensitivity analyses below have been determined based on the exposure to interest rates for derivatives and other financial liabilities at the balance sheet date. A 100 basis point increase or decrease is used when reporting interest rate risk and represents management s assessment of the reasonably possible change in interest rates. If interest rates had been 100 basis points higher/lower and all other variables were held constant, Telkom s profit for the year ended March 31, 2008 would decrease/increase by R3 million (2007: decrease/increase by RNil; 2006: decrease/increase by R9 million). This is attributable to the fixed-line s segment exposure to interest rates on its derivative and floating rate debt portfolios. 224

119 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.7 Sensitivity analysis (continued) Interest rate risk (continued) The table below illustrates Mobile s sensitivity (Group share) to a 100 basis point increase/decrease in the interest rate RSA prime rates, JIBAR rates, Money market rates, and RSA BA rates Basis points increase Profit/(loss) before tax (Rm) (12) LIBOR Basis points increase Profit/(loss) before tax (Rm) 0 0 (5) EURIBOR Basis points increase Profit/(loss) before tax (Rm) Lesotho prime rates Basis points increase Profit/(loss) before tax (Rm) Foreign exchange currency risk The following table illustrates the sensitivity to a reasonably possible change in the foreign exchange rate, with all other variables held constant, to the Group s profit before tax (excluding the Mobile segment). Increase/decrease Effect on profit in foreign before tax exchange currency increase/(decrease) % Rm 2008 Rand appreciates USD +10 (25) EURO +10 (42) Rand depreciates USD EURO Rand appreciates USD +10 (18) EURO +10 (27) Rand depreciates USD EURO Telkom Annual Report Rand appreciates USD +10 (11) EURO +10 (17) Rand depreciates USD EURO 10 17

120 Notes to the consolidated annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.7 Sensitivity analysis (continued) Foreign exchange currency risk (continued) The following table details Mobile s sensitivity to the below-mentioned percentage strengthening and weakening in the functional currency against the relevant foreign currencies. A positive number indicates an increase in profit before taxation where the functional currency is expected to strengthen against the relevant currency in a net financial liability position. A negative number indicates a decrease in profit before taxation where the functional currency is expected to strengthen against the relevant currency in a net financial asset position. The Group is exposed to 50% of the following: South United African Pound States Rand Euro Sterling Dollar % % % % 2008 South African Rands United States Dollar Tanzanian Shilling Mozambican Meticals Profit before tax (Rm) 2 (54.4) (1.0) (7.7) 2007 South African Rands United States Dollar Tanzanian Shilling Mozambican Meticals Profit before tax (Rm) 6.3 (36.8) (2.6) South African Rands United States Dollar Tanzanian Shilling Mozambican Meticals Profit before tax (Rm) 3.2 (16.9) (38.3)

121 Notes to the consolidated annual financial statements (continued) Financial instruments and risk management (continued) 12.7 Sensitivity analysis (continued) Exchange rate table (closing rate) USD Euro Pound Sterling Swedish Krona Japanese Yen Capital management The Group s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Group monitors capital using net debt to equity ratio. Telkom s policy is to keep the net debt to equity ratio between 50% and 70%. Vodacom s strategy is to maintain a net debt to adjusted equity ratio of below 150%. Included in net debt are interest bearing loans and borrowings, credit facilities and other financial liabilities, less cash and cash equivalents and other financial assets. Telkom plans on continuing its share buy back strategy based on certain criteria, including market conditions, availability of cash and other investments opportunities and needs. All of Telkom s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for dividends. No dividend may be declared to a holder of the class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of all ordinary shares. Telkom s current dividend policy aims to provide shareholders with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable us to achieve our strategy. Telkom may revise its dividend policy from time to time. The determination to pay dividends, and the amount of the dividends, will depend upon, among other things the earnings, financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy back plans. The Group has access to financing facilities, the total unused amount which is R7,565 million at the balance sheet date. Capital comprises equity attributable to equity holders of Telkom. There were no changes in the Group s approach to capital management during the year. Neither the Group nor any of its subsidiaries are subject to externally imposed capital requirements. The net debt to equity ratio at year end was as follows: Rm Rm Rm Non-current portion of interest-bearing debt 7,655 4,338 9,403 Current portion of interest -bearing debt 3,468 6,026 6,330 Credit facilities utilised ,342 Non-current portion of other financial liabilities Current portion of other financial liabilities Less: Cash and cash equivalents (4,948) (749) (1,134) Less: Other financial assets (275) (259) (614) Net debt 6,828 10,026 16,617 Equity attributable to equity holders of Telkom 29,165 31,724 32,815 Telkom Annual Report Net debt to equity ratio 23.4% 31.6% 50.6%

122 Notes to the consolidated annual financial statements (continued) 13. Investments 2,894 1,384 1,448 Available-for-sale Unlisted investments Rascom 0.69% (2007: 0.69%, 2006: 0.70%) interest in Regional African Satellite Communications Organisation, headquartered in Abidjan, Ivory Coast, at cost. Cost Impairment (1) (1) (1) The fair value of this unlisted investment cannot be practicably determined. The directors valuation is based on the Group s interest in the entity s net asset value converted at year-end exchange rates. The directors valuation of the above unlisted investment is RNil (2007: RNil; 2006: RNil) Rm Rm Rm WBS Holdings (Proprietary) Limited ,500 ordinary shares at R0.01 each The directors valuation of this unlisted investment is not materially different from the carrying amount as it is recognised at fair value. The investee company also granted the Group an option to subscribe for additional shares (refer to note 12) from the 10% currently held up to an aggregate of 25.5%. Other investments 7 32 The Group purchased a 10% equity stake in G-Mobile Holdings Limited and a 25.93% equity stake in Gogga Tracking Solutions (Proprietary) Limited. The investee companies also granted the Group an option to increase the investments (refer to note 27). During 2008 the Group purchased a 50% equity stake in Waterberg Lodge (Proprietary) Limited, a 35% equity stake in X-Link Communications (Proprietary) Limited and increased its interest in G-Mobile Holdings Limited from 10% to 26% by exercising the call option granted in Loans and receivables Mirambo Limited 60 Mirambo Limited bought the 16% and 19% equity stake of Planetel Communications Limited and Caspian Limited respectively in Vodacom Tanzania Limited on November 30, The shareholder loans with a combined nominal value of USD14.9 million, were transferred to Mirambo Limited in order to meet its obligations to Vodacom Tanzania Limited in respect of shareholder contributions. The loan bears interest at LIBOR plus 5% and shall be repaid from any cash distributions by Vodacom Tanzania Limited to Mirambo Limited. The loan and capitalised interest are collateralised by cession over all shareholder distributions and a pledge over the shares of Vodacom Tanzania Limited.

123 Notes to the consolidated annual financial statements (continued) 13. Investments (continued) Loans and receivables (continued) Planetel Communications Limited The loan with a nominal value of USD7 million (Group share: USD3,5 million) issued during the 2003 year, bore interest at LIBOR plus 5%. Planetel Communications Limited utilised this loan to ensure sufficient shareholder loan funding by itself as a shareholder of Vodacom Tanzania Limited. The loans and capitalised interest were collateralised by cession over all shareholder distributions and a pledge over their shares of Vodacom Tanzania Limited. All the shareholders subordinated their loans to Vodacom Tanzania Limited for the duration of the project finance funding period, which expired at the end of the current financial year (refer to note 27). On November 30, 2007, Planetel Communications sold it s 16% shareholding in Vodacom Tanzania Limited to Mirambo Limited Rm Rm Rm Caspian Limited The loan with a nominal value of USD8 million (Group share: USD4 million) issued during the 2003 year, bore interest at LIBOR plus 5%. Caspian Limited utilised this loan to ensure sufficient shareholder loan funding by itself as a shareholder of Vodacom Tanzania Limited. The loans and capitalised interest were collateralised by cession over all shareholder distributions and a pledge over the shares of Vodacom Tanzania Limited. All the shareholders subordinated their loans to Vodacom Tanzania Limited for the duration of the project finance funding period, which expired at the end of the current financial year (refer to note 27). On November 30, 2007, Caspian sold its 19% shareholding in Vodacom Tanzania Limited to Mirambo Limited. Number Portability Company (Proprietary) Limited 3 3 The shareholder loan made to Number Portability Company (Proprietary) Limited ( NPC ) for an amount of R6 million (Group share: R3 million) at March 2007, is subordinated and ranks behind the claims of all creditors of NPC for repayment until such time as the assets of NPC fairly valued exceed its liabilities and in such case, the loan shall cease to be subordinated to the extent that the assets of NPC exceed its liabilities from time to time. The shareholder loan bears no interest and has no fixed repayment terms. Sekha-Metsi Investment Consortium Limited 8 The loan was advanced to Sekha-Metsi Investment Consortium Limited and bore interest at South African overdraft interest rates plus a margin of 2%. Interest was payable monthly in arrears. The loan was repayable on demand, should Sekha-Metsi Investment Consortium Limited be able to obtain a loan externally. Sekha-Metsi Investment Consortium Limited pledged their shares in Sekha-Metsi Enterprises (Proprietary) Limited as security for the loan. During the current financial year the loan was repaid. Telkom Annual Report

124 Notes to the consolidated annual financial statements (continued) 13. Investments (continued) Loans and receivables (continued) Rm Rm Rm Empresa Moçambicana de Telecommuniçãcoes S.A.R.L. ( Emotel ) 4 The loan with a nominal value of USD0.9 million issued during the 2008 financial year bears interest at LIBOR plus 2%. Interest is capitalised on a monthly basis. The loan and capitalised interest are repayable upon the expiry of 5 years following the advance date, being March 31, Emotel utilised this loan to meet its obligations to V.M, S.A.R.L. in respect of its 2% shareholding in V.M, S.A.R.L. The loan and capitalised interest are collateralised by cession over all cash distributions and a pledge over their shares in V.M, S.A.R.L. Tel.One (Pvt) Limited 32 The loan to Tel.One (Pvt) Limited was unsecured, interest-free and was repayable through traffic revenue from June 2004 over 5 years. R41 million traffic was set off against the loan in the 2007 financial year, hence settling the full amount of the loan in advance. Other receivables 11 Held for trading 2,874 1,349 1,377 Linked insurance policies Coronation 1,182 1,280 1,291 Linked insurance policies Investec 24 Ordinary shares listed 1,059 Cash 229 Other money market investments Government stock 44 Other unlisted investments Less: Short-term investments (69) (77) (51) Tel.One (Pvt) Limited (13) Sekha-Metsi Investment Consortium Limited (8) WBS Holdings (Proprietary) Limited (included in Other unlisted investments) (13) Other money market investments (56) (69) (38) 230 Included in held for trading investments is R1,290 million (2007: R1,279 million, 2006: R2,819 million) that will be used to fund the postretirement medical aid liability. These investments are made through a cell captive, in which Telkom holds 100% of the preference shares of the cell captive, and represent the fair value of the underlying investments of the cell captive. The initial cost of the investment amounts to R535 million (2007: R535 million; 2006: R1,891 million). Telkom bears all the risks and rewards of the investment, as the returns/losses on the preference shares are dependant on the performance of the underlying investments made by the cell captive. On this basis Telkom as the preference shareholder, receives any residual gains or losses made by the cell captive. The ordinary shareholders of the cell captive do not bear any of the risks and rewards. The cell captive has been consolidated in full. The cell captive has an investment in a sinking fund and an annuity policy. In the financial year ended March 31, 2007 an addendum to the cell captive annuity policy was signed, which resulted in the annuity policy qualifying as a plan asset. This resulted in a reduction in the investment of R1,961 million in the financial year ended March 31, 2007 (refer to note 29).

125 Notes to the consolidated annual financial statements (continued) 14. Deferred revenue and Deferred expenses Rm Rm Rm Deferred expenses Deferred expenses Current portion of deferred expenses Included in long-term deferred expenses and revenue is Vodacom unactivated starter packs. The current portion of deferred expenses represents the deferral of connection costs. Deferred revenue 2,966 3,004 3,721 Deferred revenue 991 1,021 1,128 Current portion of deferred revenue 1,975 1,983 2,593 Included in deferred revenue is profit on the sale and lease-back of certain Telkom buildings of R118 million, consisting of a long-term portion of R107 million and a short-term portion of R11 million (2007: R129 million; 2006: R140 million). A profit of R11 million per annum is recognised in income on a straight-line basis, over the period of the lease ending 2019 (refer to note 37). 15. Finance lease receivables The Group provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to specific customers. The disclosed information relates to certain customer arrangements which were assessed to be finance leases in terms of IAS17. In terms of IFRIC4 the Group has concluded that some of its voice and non-voice service arrangements with its customers contain a lease. IFRIC4 required the entity to assess existing arrangements at the beginning of the earliest period for which comparative information under IFRS is presented on the basis of facts and circumstances existing at the beginning of that period. The effect of the application of this interpretation was not considered material for 2006, and therefore all cumulative adjustments were made during the 2007 financial year. Total < 1 year 1 5 years > 5 years Rm Rm Rm Rm 2008 Minimum lease payments Lease payments receivable Unearned finance income (80) (30) (50) Present value of minimum lease payments Lease receivables Minimum lease payments Lease payments receivable Unearned finance income (66) (22) (44) Telkom Annual Report Present value of minimum lease payments Lease receivables

126 Notes to the consolidated annual financial statements (continued) Rm Rm Rm 16. Deferred taxation (587) (1,123) (1,374) Opening balance (435) (587) (1,123) Income statement movements (173) (516) (219) Temporary differences (280) (515) (331) Over provision/(under provision) prior year 107 (1) 53 Change in tax rate 59 Business combinations 21 (16) (65) Foreign currency translation reserve and foreign equity revaluation (4) 33 The balance comprises: (587) (1,123) (1,374) Capital allowances (2,682) (3,325) (3,841) Provisions and other allowances 1,682 1,719 2,008 Tax losses STC tax credits Deferred tax balance is made up as follows: (587) (1,123) (1,374) Deferred tax assets Deferred tax liabilities (1,068) (1,716) (1,979) Unutilised STC credits 2,393 2,958 1,830 Under South African tax legislation, tax losses for companies continuing to do business do not expire. The unused taxation losses available to reduce the net deferred taxation liability is R1,615 million of which R1,456 relates to Vodacom (2007: R1,134 million; 2006: R876 million) (Group share: R728 million; 2007: R567 million; 2006: R438 million). The full effect of this would be a R511 million of which R466 million relates to Vodacom (2007: R363 million; 2006: R279 million) (Group share: R233 million; 2007: R182 million; 2006: R140 million) reduction in the net deferred taxation liability. The deferred tax asset represents amongst other items STC credits on past dividends received. The deferred tax asset for the current period is calculated using the revised STC rate of 10% (previously 12,5%) as announced by the Minister of Finance. The deferred tax asset is recognised as it is considered probable that it will be utilised in the future, given Telkom s dividend policy. The asset will be released as a tax expense when dividends are declared. The deferred tax liability increased mainly due to the increase in the difference between the carrying value and tax base of assets, resulting from the change in the estimate of useful lives of the assets as well as from the acquisition of Multi-Links Telecommunications Limited. 232

127 Notes to the consolidated annual financial statements (continued) 17. Inventories 814 1,093 1,287 Gross inventories 916 1,275 1,535 Write-down of inventories to net realisable value (102) (182) (248) Inventories consist of the following categories: 814 1,093 1,287 Installation material, maintenance material and network equipment Merchandise Write-down of inventories to net realisable value Opening balance Charged to selling, general and administrative expenses Inventories written-off (29) (74) (98) Inventory levels as at March 31, 2008 and 2007 have increased due to the roll-out of the Next Generation Network and increased inventory levels, required to improve customer service. The increase in merchandise in the current year is due to the accelerated acquisition of merchandise to limit the Group s exposure to foreign currency fluctuations Rm Rm Rm 18. Trade and other receivables 6,399 7,303 8,986 Trade receivables 5,798 6,557 7,695 Gross trade receivables 6,088 6,792 7,985 Impairment of receivables (290) (235) (290) Prepayments and other receivables ,291 Impairment of receivables Opening balance Charged to selling, general and administrative expenses Receivables written-off (201) (208) (245) Refer to note 12 for detailed credit risk analysis. The increase in the charged to selling, general and administrative expenses is as a result of increased revenues which resulted in a higher provision for doubtful debts. Telkom Annual Report

128 Notes to the consolidated annual financial statements (continued) 19. Other financial assets and liabilities Other financial assets consist of: At fair value through profit or loss Bills of exchange Interest rate swaps Forward exchange contracts Other financial assets 16 Bills of exchange The fair value of bills of exchange has been derived at with reference to BESA quoted prices Rm Rm Rm Other financial liabilities consist of: (235) (229) (1,290) Long-term portion of other financial liabilities Other (refer to note 12) (36) Put option at fair value through profit or loss (refer to note 12) (919) Current portion of other financial liabilities At fair value through profit or loss (235) (193) (371) Put option at fair value through profit or loss (refer to note 12) (125) (198) Interest rate swaps (105) (26) Forward exchange contracts (130) (42) (173) Change in comparative Derivative instruments in other financial liabilities category increased by R125 million in 2007 (2006: RNil) due to the reclassification of the Vodacom DRC put option from trade and other payables. 234

129 Notes to the consolidated annual financial statements (continued) 20. Net cash and cash equivalents 4, (208) Cash shown as current assets 4, ,134 Cash and bank balances 1, Short-term deposits 3, Credit facilities utilised (693) (441) (1,342) Undrawn borrowing facilities 9,519 8,658 7,565 The undrawn borrowing facilities are unsecured, when drawn bear interest at a rate that will be mutually agreed between the borrower and lender at the time of drawdown, have no specific maturity date and are subject to annual review. The facilities are in place to ensure liquidity. At March 31, 2008, R2,000 million of these undrawn facilities were committed. Borrowing powers To borrow money, Telkom s directors may mortgage or encumber Telkom s property or any part thereof and issue debentures, whether secured or unsecured, whether outright or as security for debt, liability or obligation of Telkom or any third party. For this purpose the borrowing powers of Telkom are unlimited, but are subject to the restrictive financial covenants of the TL20 and the conditions and covenants of the Bridge Loan facility indicated on note Share capital and premium Authorised and issued share capital and share premium are made up as follows: Rm Rm Rm Authorised 10,000 10,000 10, ,999,998 ordinary shares of R10 each 10,000 10,000 10,000 1 Class A ordinary share of R10 1 Class B ordinary share of R10 Issued and fully paid 6,791 5,329 5, ,784,184 (2007: 532,855,528; 2006: 544,944,899) ordinary shares of R10 each 5,449 5,329 5,208 1 (2007: 1; 2006: 1) Class A ordinary share of R10 1 (2007: 1; 2006: 1) Class B ordinary share of R10 Share premium 1,342 The following table illustrates the movement in the number of shares issued: Number of Number of Number of shares shares shares Shares in issue at beginning of year 557,031, ,944, ,855,530 Shares bought back and cancelled* (12,086,920) (12,089,371) (12,071,344) Telkom Annual Report Shares in issue at end of year 544,944, ,855, ,784,186 Full details of the voting rights of ordinary, class A and class B shares are documented in the Articles of Association of Telkom. *As of March 31, 2008, 4,444,138 of these shares had not yet been cancelled from the issued share capital by the Registrar of Companies.

130 Notes to the consolidated annual financial statements (continued) 21. Share capital and premium (continued) Share buy-back During the financial year Telkom bought back 12,071,344 ordinary shares at a total consideration of R1,647 million. This reduced Share capital by R121 million and Retained earnings by R1,526 million. During the financial year ended March 31, 2007, Telkom bought back 12,089,371 ordinary shares at a total consideration of R1,596 million. This reduced Share capital by R120 million, Share premium by R1,342 million and Retained earnings by R134 million. During the financial year ended March 31, 2006, Telkom bought back 12,086,920 ordinary shares at a total consideration of R1,502 million. This reduced the Share capital by R121 million and Share premium by R1,381 million. Capital Management Refer to note 12 for a detailed capital management disclosure Rm Rm Rm 22. Treasury shares (1,809) (1,774) (1,638) At March 31, 2008, 10,493,141 (2007: 12,237,016; 2006: 12,687,521) and 10,849,058 (2007: 10,849,058; 2006: 10,849,058) ordinary shares in Telkom, with a fair value of R1,377 million (2007: R2,031 million; 2006: R2,038 million) and R1,423 million (2007: R1,801 million; 2006: R1,743 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively. The shares held by Rossal No 65 (Proprietary) Limited are reserved for issue in terms of the Telkom Conditional Share Plan ( TCSP ). In addition, the Board of directors agreed that, subject to the JSE Listing requirements, the treasury shares held by Acajou Investments (Proprietary) Limited be made available to the TCSP to make up for the current shortfall in the share scheme after the additional grants made in the current year (refer to note 23). The reduction in the number of treasury shares is due to 1,743,785 shares (2007: 450,505; 2006: 29,669) shares that vested in terms of the TCSP during the year. The fair value of these shares at the date of vesting was R301 million (2007: R63 million; 2006: R4 million). 236

131 Notes to the consolidated annual financial statements (continued) 23. Share-based compensation reserve Rm Rm Rm This reserve represents the cumulative fair value of the equity-settled share-based payment transactions recognised in employee expenses over the vesting period of the equity instruments granted to employees in terms of the Telkom Conditional Share Plan (refer to note 29). The Telkom Board approved the fourth enhanced allocation of shares to employees on September 4, 2007, with a grant date of September 27, 2007, the day that the employees and Telkom shared a common understanding of the terms and conditions of this grant. A total of 6,089,810 shares were granted. The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007, with a grant date of September 27, The number of additional shares granted with respect to the 2006 allocation is 4,966,860. No consideration is payable on the shares issued to employees, but performance criteria will have to be met in order for the granted shares to vest. The ultimate number of shares that will vest may differ based on certain individual and Telkom performance conditions being met. The related compensation expense is recognised over the vesting period of shares granted, commencing on the grant date. The following table illustrates the movement within the Share-based compensation reserve: Balance at beginning of year Net increase in equity Employee cost* Accelerated vesting of shares (37) Vesting and transfer of shares (35) (136) Balance at end of year At March 31, 2008 the estimated total compensation expense to be recognised over the vesting period was R2,151 million (2007: R580 million; 2006: R381 million), of which R522 million (2007: R141 million; 2006: R120 million) was recognised in employee expenses for the year. *The increase in the employee costs in the current financial year is mainly as a result of the additional share allocations (refer to note 29). Telkom Annual Report

132 Notes to the consolidated annual financial statements (continued) 24. Non-distributable reserves 1,128 1,413 1,292 Opening balance 360 1,128 1,413 Movement during the year (121) Foreign currency translation reserve (net of tax of R6 million; 2007: R4 million; 2006: RNil) Minority put option (refer to note 12) (661) Revaluation of an available-for-sale investment (net of tax of R1 million) 8 Available-for-sale financial asset Life fund reserve (Cell captive) The balance comprises: 1,128 1,413 1,292 Foreign currency translation reserve (104) (58) 463 Cell Captive reserve 1,232 1,471 1,482 Available-for-sale investment 8 Minority put option (661) The Group has two consolidated cell captives, one used as an investment to fund Telkom s post-retirement medical aid liability and the other is for Vodacom s short-term insurance obligation in respect of handsets. In terms of the Short-term Insurance Act, 1998, the Vodacom Group s cell captive partner, Nova Risk Partners Limited is required to recognise a contingency reserve equal to 10% of premiums written less approved reinsurance (as defined in the Act). This reserve can be utilised only with the prior permission of the Registrar of Short-term Insurance. The earnings from the cell captives are recognised in the income statement and then transferred to Non-distributable reserves. Gains and losses from changes in the fair value of available-for-sale investments are recognised directly in equity until the financial asset is disposed of Rm Rm Rm 25. Retained earnings 22,904 26,499 27,310 Opening balance 19,232 22,904 26,499 Movement during year 3,672 3,729 2,337 Net profit for the year 9,189 8,646 7,975 Transfer to non-distributable reserves (refer to note 24) (716) (239) (11) Dividend declared (refer to note 34) (4,801) (4,678) (5,627) Shares bought back (refer to note 21) (134) (1,526) 238 The balance comprises: 22,904 26,499 27,310 Company 18,534 21,906 22,484 Joint venture 4,293 4,762 5,697 Subsidiaries Eliminations (491) (955) (1,299)

133 Notes to the consolidated annual financial statements (continued) 26. Minority interest Opening balance Movement during the year 81 (17) 238 Reconciliation: Balance at beginning of year Share of earnings Acquisition of subsidiaries and minorities 27 (68) 77 Foreign currency translation reserves (7) Dividend declared (78) (166) (65) 27. Interest-bearing debt Rm Rm Rm Long-term interest-bearing debt 7,655 4,338 9,403 Total interest-bearing debt 11,123 10,364 15,733 Gross interest-bearing debt 13,686 12,549 17,839 Discount on debt instruments issued (2,563) (2,185) (2,106) Less: Current portion of interest-bearing debt (3,468) (6,026) (6,330) Local debt (2,642) (5,772) (6,001) Locally registered Telkom debt instruments (2,211) (4,432) Commercial paper bills (429) (1,339) (3,401) Short-term interest-free loans (2) (1) Call borrowings (2,600) Foreign debt (786) (193) (202) Finance leases (40) (61) (124) Licence obligation (3) Total interest-bearing debt is made up as follows: 11,123 10,364 15,733 (a) Local debt 8,938 8,131 12,923 Locally registered Telkom debt instruments 8,507 6,786 8,164 Name, maturity, rate p.a., nominal value TK01, 2008, 10%, RNil (2007: R4,680 million; 2006: R4,689 million) 4,230 4,432 TL06, 2006, 10.5%, RNil (2007: RNil; 2006: R2,100 million) 2,103 TL20, 2020, 6%, R2,500 million (2007: R2,500 million; 2006: R2,500 million) 1,214 1,246 1,283 PP02, 2010, 0%, R430 million (2007: R430 million; 2006: R430 million) PP03, 2010, 0%, R1,350 million (2007: R1,350 million; 2006: R1,350 million) Call borrowings, 2009, 11.58%, R2,600 million (2007: RNil; 2006: RNil) 2,600 Term loans, 2010, 12.22%, R3,000 million (2007: RNil; 2006: RNil) 3,000 Local bonds The local Telkom bonds are unsecured, but a side letter to the subscription agreement (as amended) of the TL20 bond, and the R1,600 million Bridge Loan facility, included in Call borrowings, contain a number of restrictive financial covenants to be maintained by the Group at the following ratios: EBITDA to net interest expense ratio of no less than 3.5:1 and net interest bearing debt to EBITDA ratio of no greater than 3.0:1 which, if not met, could result in the early redemption of the loan. The R1,600 million Bridge Loan facility and R2,000 million Term loan agreement agreements limit the Group s ability to encumber, cede, assign, sell or otherwise dispose of a material portion of its assets without the prior written consent of the Lenders, which will not be unreasonably withheld. The TL20, PP02, and PP03 local bonds limit Telkom s ability to create encumbrances on revenues or assets, and secure any indebtedness without securing the outstanding bonds equally and rateably with such indebtedness. Telkom Annual Report

134 Notes to the consolidated annual financial statements (continued) 27. Interest-bearing debt (continued) (a) Local debt (continued) Commercial paper bills 429 1,339 4,202 Rate p.a., nominal value 2008, 11.71% (2007: 9.04%; 2006: 7%), R4,383 million (2007: R1,350 million; 2006: R430 million) Rm Rm Rm Asset Backed Arbitraged Securities (Proprietary) Limited 500 On December 5, 2007 Vodacom (Proprietary) Limited entered into a subscription agreement with Asset Backed Arbitraged Securities (Proprietary) Limited ( ABACAS ). In terms of the agreement Vodacom (Proprietary) Limited issued debt instruments in the form of two promissory notes with a nominal value of R500 million (Group shares: R250 million) each to which ABACAS subscribed. The debt instrument will bear interest based on JIBAR plus credit margin and funding margin. The repayment term is three years with interest being paid quarterly. The credit margin is 0.4% and the funding margin is 0.18% and 0.15% respectively. Licence Obligation 47 On December 9, 2004, ICASA amended the Vodacom South Africa licence to allow for access to the 1800 Megahertz frequency spectrum band and the 3G radio spectrum band. The costs to the Group for the 1800 Megahertz frequency band obligations is estimated at R68.8 million (Group share R34.4 million). The net present value, at a discount rate of 8%, over three years amounts to R64 million (Group share: R32 million). The cost to the Group for the 3G radio sprectrum band obligation is estimated at R36.8 million (Group share: R18.4 million). The net present value, at a discount rate of 8%, over three year amounts to R32.2 million (Group share: R16.1 million). Other debt Other debt includes Vodacom Group shareholders loans with variable payment terms. Group share is 50% on the respective balances. (b) Foreign debt 913 1,013 1,643 Maturity, rate p.a., nominal value Euro: , 0.1% 0.14% (2007: 0.10% 0.14%; 2006: 0.10% 6.81%), 511 million (2007: 511 million; 2006: 511 million) Mirambo Limited Mirambo Limited bought the 16% and 19% equity stake of Planetel Communications Limited and Caspian Limited respectively in Vodacom Tanzania Limited on November 30, The shareholder loans with a combined nominal value of USD18 million (Group share: USD9 million), were transferred to Mirambo Limited in order to meet its obligations to Vodacom Tanzania Limited in respect of shareholder contributions. The loan bears interest at LIBOR plus 5% and shall be repaid by approval of at least 60% of the shareholders of Vodacom Tanzania Limited. The loan and capitalised interest are unsecured and surbordinated.

135 Notes to the consolidated annual financial statements (continued) 27. Interest-bearing debt (continued) (b) Foreign debt (continued) Planetel Communications Limited The shareholder loan of USD8 million (2007: USD8 million; 2006: USD8 million) (Group share: USD4 million; 2007: USD4 million; 2006: USD4 million) was subordinated for the duration of the project finance funding period of Vodacom Tanzania Limited, which expired at the end of the current financial year, bore no interest from April 1, 2002, and was thereafter available for repayment, by approval of at least 60% of the shareholders of Vodacom Tanzania Limited. The loan became non-interest bearing and was remeasured at amortised cost at an effective interest rate of LIBOR plus 5%. The gain on remeasurement was included in equity. On November 30, 2007 Planetel Communications Limited sold its 16% shareholding in Vodacom Tanzania Limited to Mirambo Limited Rm Rm Rm Caspian Limited The shareholder loan of USD10 million (2007: USD10 million; 2006: USD10 million) (Group share: USD5 million; 2007: USD5 million; 2006: USD5 million) was subordinated for the duration of the project finance funding period of Vodacom Tanzania Limited, bears no interest from April 1, 2002, and was thereafter available for repayment, by approval of at least 60% of the shareholders of Vodacom Tanzania Limited. The loan became non-interest bearing and was remeasured at amortised cost at an effective interest rate of LIBOR plus 5%. The gain on remeasurement was included in equity. On November 30, 2007 Caspian Limited sold its 19% shareholding in Vodacom Tanzania Limited to Mirambo LImited. Loan to Vodacom International Limited The loan provided by Standard Bank Plc and RMB International (Dublin) Limited that amounts to USD180 million (2007: USD180 million; 2006: USD180 million) (Group share: USD90 million; 2007: USD90 million 2006; USD90 million)) is collateralised by guarantees provided by the Vodacom Group. The loan originally repayable on July 19, 2006, was refinanced during the 2007 financial year. The loan is now repayable on July 26, 2009 and bears interest at an effective interest rate of LIBOR plus 0.35%. Project finance funding for Vodacom Tanzania Limited The drawn down portions of the project finance funding from external parties include the following: (a) Netherlands Development Finance Company USDNil (2007: USD4 million; 2006: USD8 million) (Group share: USDNil; 2007: USD2 million; 2006: USD4 million) (b) Deutsche Investitions und Entwicklungsgesellschaft mbh 5Nil (2007: 54 million; 2006: 58 million) (Group share: 5Nil; 2007: 52 million; 2006: 54 million) (c) Standard Corporate and Merchant Bank USDNil (2007: USD4 million; 2006: USD8 million) (Group share: USDNil; 2007: USD2 million; 2006: USD4 million) (d) Barclays Bank (Local Syndicate Tanzania) TSHNil (2007: TSHNil; 2006: TSH5,704 million) (Group share: TSHNil; 2007: TSHNil; 2006: TSH2,852 million). The funding was collateralised by a charge over 51% of the shares, the license and Vodacom Tanzania Limited s tangible assets and intangible assets. The loans bore interest based upon the foreign currency denomination of the project financing between 6% and 14.4% per annum and was fully repaid in the 2008 financial year. Telkom Annual Report

136 Notes to the consolidated annual financial statements (continued) Rm Rm Rm Interest-bearing debt (continued) (b) Foreign debt (continued) Vodacom Congo (RDC) s.p.r.l Vodacom s share of the short-term facilities amount to USD1 million (2007: USD3 million; 2006: USD6 million) (Group share: USD1 million; 2007: USD2 million; 2006: USD3 million) bears interest at 18% per annum with no fixed repayment terms. USD2 million (Group share: USD1 million) of these facilities was repaid on June 30, 2007 and bore interest at LIBOR plus 6% per annum. Preference shares issued by Vodacom Congo (RDC) s.p.r.l The preference shares of USD37 million (2007: USD37 million; 2006: USD37 million) (Group share: USD19 million; 2007: USD19 million; 2006: USD19 million) bear interest at a rate of 4% per annum. The preference shares are redeemable at the discretion of the shareholders and on the basis that the shareholders are repaid simultaneously and in proportion to their shareholding. Zenith Bank 45 Multi-Links Telecommunications Limited has taken out a loan from Zenith Bank. The original loan amounted to USD14 million against which repayments amounting to USD8.4 million have already been made. The loan bears interest at LIBOR plus 3.5% and will be repaid during FCMB Loan 87 Multi-Links Telecommunications Limited has taken out a FCMB loan.the original loan amounted to Naira 1,500 million against which repayments amounting to Naira 250 million have already been made. The loan bears interest at 13% and will be fully repaid during This loan is secured by a charge on assets registered in the form of a debenture trust deed. The deed is valued at Naira 520 million as at March 31, Export Development Bank of Canada 82 Multi-Links Telecommunications Limited has a long-term funding facility in place with Export Development Bank of Canada (EDC), through First Bank of Nigeria Plc. The original funding amounted to USD18 million against which USD8 million repayments have already been made. The loan bears interest at LIBOR plus 2.5%, and will be fully repaid during Huawei Vendor Financing Facility VFF 319 Multi-Links Telecommunications Limited entered into a Bridge Financing agreement with Huawei Tech Investment Co. Limited for the supply of telecommunications equipment and services. The original funding amounted to USD41.6 million against which repayments of USD2 million have already been made. The loan bears interest at LIBOR plus 2% and will be repaid by The above arrangement is temporary until financing facilities are obtained from China Development Bank. PTA Bank and Barclays Bank 12 Africa Online Group has taken out a loan from PTA Bank and Barclays Bank that in total amounts to USD1,5 million. Of this amount USD0.8 million bears interest at LIBOR plus 6% and the remaining USD0.4 million bears interest at 11.5%. (c) Finance leases 1,272 1,220 1,167 The finance leases are secured by buildings with a carrying value of R634 million (2007: R564 million; 2006: R618 million) and office equipment with a book value of R14 million (2007: R10 million; 2006: R6 million) (refer to note 10). These amounts are repayable within periods ranging from 1 to 12 years. Interest rates vary between 13% and 38%.

137 Notes to the consolidated annual financial statements (continued) 27. Interest-bearing debt (continued) Included in long-term and short-term debt is: Debt guaranteed by the South African Government 4,315 4, A major portion of the guaranteed debt for the years ended March 31, 2007 and 2006 relates to the TK01 debt instrument, however, this instrument has been redeemed in full during the year ended March 31, Telkom may issue or re-issue locally registered debt instruments in terms of the Post Office Amendment Act 85 of The borrowing powers of Telkom are set out as per note 20. Repayments/refinancing of current portion of interestbearing debt The repayment/refinancing of R6,330 million of the current portion of interest-bearing debt will depend on the market circumstances at the time of repayment. Management believes that sufficient funding facilities will be available at the date of repayment/refinancing. Loans raised and loans repaid on the cash flow statement increased due to raising and redemption of the Commercial Paper Bills in Telkom, as well as newly acquired Asset Backing finance in Vodacom Rm Rm Rm 28. Provisions 2,677 1,443 1,675 Employee related 4,293 3,005 3,186 Annual leave Balance at beginning of year Charged to employee expenses Leave paid (69) (9) (19) Post-retirement medical aid (refer to note 29) 2,607 1,139 1,356 Balance at beginning of year 2,430 2,607 1,139 Interest cost Current service cost Expected return on plan asset (188) (257) Actuarial loss Curtailment gain (8) Settlement loss 7 Termination settlement (29) Plan asset initial recognition (1,720) Contributions paid (153) (78) (61) Telkom Annual Report 2008 Telephone rebates (refer to note 29) Balance at beginning of year Interest cost Current service cost Past service cost 76 2 Actuarial loss 5 Benefits paid (20) (22) 243 Bonus 1,071 1, Balance at beginning of year 826 1,071 1,090 Charged to employee expenses Payments made (720) (946) (895) Long-term incentive provision* Balance at beginning of year Charged to employee expenses Payment (8) (1) (9)

138 Notes to the consolidated annual financial statements (continued) 28. Provisions (continued) Non-employee related Supplier dispute (refer to note 38) Balance at beginning of year 527 Net movements Warranty provision 16 Balance at beginning of year Charged to expenses 20 Provision utilised (18) (16) Other Less: Current portion of provisions (1,660) (2,095) (2,181) Annual leave (356) (402) (417) Post-retirement medical aid (159) (186) (186) Telephone rebates (17) (26) (26) Bonus (1,071) (911) (921) Supplier dispute (527) (569) Warranty provision (16) Other (41) (43) (62) Annual leave Rm Rm Rm In terms of Telkom s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 22 days (previously 25 days) which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation. Bonus The Telkom bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets. The bonus is payable bi-annually to all qualifying employees after Telkom s results have been made public. Vodacom s bonus provision consists of a performance bonus based on the achievement of the predetermined financial targets payable to all levels of staff. Deferred bonus incentive Vodacom s deferred bonus incentive provision represents the present value of the expected future cash outflows of the entitlement value at the balance sheet date less the value at which the entitlements were issued, multiplied by the number of entitlements allocated to a participant. Periodically, a number of entitlements are issued to employees, the value of which depends on the seniority of the employee. The participating rights of employees vest at different stages and employees are entitled to cash in their entitlements within one year after the participating rights have vested. The provision is utilised when eligible employees receive the value of vested entitlements. 244 Supplier dispute Telkom provided R569 million (2007: R527 million; 2006: RNil) for its estimate of the probable liability as discussed in note 38. The net movement in the provision of R42 million (2007: R17 million; 2006: R Nil) consists of finance charges and fair value movements offset by provisional payments made during the current year. Warranty provision The warranty provision in Vodacom covers manufacturing defects in the second year of warranty on handsets sold to customers. The estimate is based on claims notified and past experience. The suppliers of the various handsets assumed responsibility for the second year warranty subsequent to March 31, 2007 and accordingly there is no remaining provision. Other Included in other provisions is an amount provided for asset retirement obligations. Other provisions also include advertising received from suppliers of handsets and various other smaller provisions. *In the previous year the long-term incentive provision was included in other provisions.

139 Notes to the consolidated annual financial statements (continued) 29. Employee benefits The Group provides benefits for all its permanent employees through the Telkom Pension Fund and the Telkom Retirement Fund and the Vodacom Group Pension Fund. Membership of one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate. The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory funding valuations for the retirement and pension funds are performed at intervals not exceeding three years. At March 31, 2008, the Group employed 33,616 employees (2007: 33,047; 2006: 31,458). Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension and retirement funds for each of the financial periods presented. The Telkom Pension Fund The latest actuarial valuation performed at March 31, 2008 indicates that the pension fund is in a surplus position of R84 million after unrecognised gains. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised). The last statutory funding valuation of the fund performed in March 2007, indicated that the fund is fully funded. The current contributions (plus an annual top-up lump sum if necessary) are based on that valuation. Management expects to complete the next statutory valuation in November With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. During the financial year ended March 31, 2007, a settlement event occurred in the Telkom Pension Fund whereby 106 members were transferred to the Telkom Retirement Fund. The funded status of the Telkom Pension Fund is disclosed below Rm Rm Rm The Telkom Pension Fund The net periodic pension costs includes the following components: Interest and service cost on projected benefit obligations Expected return on plan assets (24) (19) (27) Recognised actuarial loss/(gain) 78 9 (16) Settlement loss/(gain) 21 (2) Asset Limitation 29 Net periodic pension expense recognised Pension fund contributions (refer to note 5.1) The status of the pension plan obligation is as follows: At beginning of year Interest and service cost Employee contributions Benefits paid (20) (2) (3) Settlements (70) (15) Actuarial loss/(gain) 89 (28) (6) Benefit obligation at end of year Plan assets at fair value: At beginning of year Expected return on plan assets Benefits paid (20) (2) (3) Contributions Settlements (61) (15) Actuarial (loss)/gain (18) Telkom Annual Report Plan assets at end of year

140 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) The Telkom Pension Fund (continued) Present value of funded obligation Fair value of plan assets (243) (284) (311) Fund status 38 (79) (107) Unrecognised net actuarial (loss)/gain (118) Net surplus (80) (54) (84) Asset Limitation 29 Recognised net asset (80) (54) (55) Expected return on plan assets Actuarial (loss)/return on plan assets (18) Actual return on plan assets Principal actuarial assumptions were as follows: Rm Rm Rm Discount rate (%) Yield on government bonds (%) Long-term return on equities (%) Long-term return on cash (%) Expected return on plan assets (%) Salary inflation rate (%) Pension increase allowance (%) The overall long-term expected rate of return on assets is 9.75%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom pension fund and expected long-term return of these assets, of which South African equities and foreign investments are the largest contributors. The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Funding level per statutory actuarial valuation (%) The number of employees registered under the Telkom Pension Fund The fund portfolio consists of the following: Equities (%) Bonds (%) Cash (%) Foreign Investments (%)* Insurance policies (%) 2 The total expected contributions payable to the pension fund for the next financial year are R7 million. *Includes offshore unit trusts.

141 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) The Telkom Retirement Fund The Telkom Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. Upon transfer the Government ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred. The Telkom Retirement Fund is a defined contribution fund with regards to in-service members. On retirement, an employee is transferred from the defined contribution plan to a defined benefit plan. Telkom, as a guarantor, is contingently liable for any deficit in the Telkom Retirement Fund. Moreover, all of the assets in the Fund, including any potential excess belong to the participants of the scheme. Telkom is unable to benefit from the excess in the form of future reduced contributions. Telkom guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement fund. The latest actuarial valuation performed at March 31, 2008 indicates that the retirement fund is in a surplus funding position of R1,368 million after unrecognised losses. The Telkom Retirement Fund is governed by the Pension Funds Act 24 of In terms of section 37A of this Act, the pension benefits payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan assets, Telkom would be required to fund the statutory deficit. The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that Telkom has a potential asset with regards to this Fund. The funded status of the Telkom Retirement Fund is disclosed below: Rm Rm Rm The Telkom Retirement Fund The net periodic retirement costs include the following components: Interest and service cost on projected benefit obligations Expected return on plan assets (430) (489) (686) Recognised actuarial gain (145) Net periodic pension expense not recognised (Asset limitation) (84) (322) (193) Retirement fund contributions (refer to note 5.1) Benefit obligation: At beginning of year 4,020 4,377 6,581 Interest and service cost Benefits paid (377) (486) (488) Liability for new pensioners Actuarial loss 388 2, Benefit obligation at end of year 4,377 6,581 7,101 Plan assets at fair value: At beginning of year 4,477 5,973 7,661 Expected return on plan assets Benefits paid (377) (486) (488) Asset backing new pensioners liabilities Actuarial gain 1,442 1, Telkom Annual Report Plan assets at end of year 5,973 7,661 7,991

142 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) The Telkom Retirement Fund (continued) Present value of funded obligation 4,377 6,581 7,101 Fair value of plan assets (5,973) (7,661) (7,991) Fund Status (1,596) (1,080) (890) Unrecognised net actuarial gain/(loss) 742 (96) (478) Unrecognised net asset (854) (1,176) (1,368) Expected return on plan assets Actuarial gain on plan assets 1,442 1, Actual return on plan assets 1,872 2, Included in the fair value of plan assets is: Office buildings occupied by Telkom Telkom bonds Telkom shares The Telkom Retirement Fund invests its funds in South Africa and internationally. Twelve fund managers invests in South Africa and five of these managers specialise in trades with bonds on behalf of the Retirement Fund. The international investment portfolio consists of global equity and hedged funds. Principal actuarial assumptions were as follows: Rm Rm Rm Discount rate (%) Yield on government bonds (%) Long-term return on equities (%) Long-term return on cash (%) Expected return on plan assets (%) Pension increase allowance (%) The overall long-term expected rate of return on assets is 10.3%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Retirement Fund and expected long-term return on these assets, of which South African equities, foreign investments and SA fixed interest bonds are the largest contributors. The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Funding level per statutory actuarial valuation (%) The number of pensioners registered under the Telkom Retirement Fund 14,323 14,451 14,255 The number of in-service employees registered under the Telkom Retirement Fund 25,320 25,766 24,939

143 Notes to the consolidated annual financial statements (continued) Employee benefits (continued) The Telkom Retirement Fund (continued) The fund portfolio consists of the following: Equities (%) Property (%) Bonds (%) Cash (%) Foreign investments (%) The total expected contributions payable to the Retirement Fund for the next financial year are R514 million. Vodacom Group Pension Fund All eligible employees of the Vodacom Group are members of the Vodacom Group Pension Fund, a defined contribution pension scheme. Certain executive employees of the Group are also members of the Vodacom Executive Provident Fund, a defined contribution provident scheme. Both schemes are administered by ABSA Consultants and Actuaries (Proprietary) Limited. The Group s share of the current contributions to the pension fund amounted to R57 million (2007: R42 million; 2006: R38 million). The Group s share of the current contributions to the provident fund amounted to R7 million (2007: R6 million; 2006: R6 milllion). South African funds are governed in terms of the Pension Fund Act of Medical benefits Telkom makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense in respect of current employees medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical benefits to current and retired employees have been actuarially determined and provided for as set out in note 29. Telkom has terminated future postretirement medical benefits in respect of employees joining after July 1, There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 ( Pre-94 ); those who retired after 1994 ( Post-94 ); and the in-service members. The Post-94 and the in-service members liability is subject to a Rand cap, which increases annually with the average salary increase. Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid benefit. The most recent actuarial valuation of the benefit was performed as at March 31, Telkom has allocated certain investments to fund this liability as set out in note 13. The cell captive annuity policy qualified as a plan asset in terms of IAS19, effective June 1, Telkom Annual Report

144 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) Medical benefits (continued) Medical aid Rm Rm Rm Benefit obligation: At beginning of year 3,079 3,904 4,384 Interest cost Current service cost Actuarial loss Settlement gain (2) Termination settlement (29) Benefits paid from plan assets (94) (125) Contributions paid by Telkom (153) (78) (61) Benefit obligation at end of year 3,904 4,384 4,850 Plan assets at fair value: At beginning of year 1,961 Plan asset initial recognition 1,720 Expected return on plan assets Benefits paid from plan assets (94) (125) Actuarial gain/(loss) 147 (164) Plan assets at end of year 1,961 1,929 Present value of funded obligation 3,904 4,384 4,850 Fair value of plan assets (1,961) (1,929) Funded status 3,904 2,423 2,921 Unrecognised net actuarial loss (1,297) (1,284) (1,565) Liability as disclosed in the balance sheet (refer to note 28) 2,607 1,139 1,356 Expected return on plan asstes Actuarial return on plan assets 147 (164) Actual return on plan assets Principal actuarial assumptions were as follows: Discount rate (%) Expected return on plan assets (%) Salary inflation rate (%) Medical inflation rate (%) The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Contractual retirement age Average retirement age Number of members 17,872 17,119 15,526 Number of pensioners 8,665 8,494 8,430 The valuation results are extremely sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of changing some of the valuation assumptions above:

145 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) Medical benefits (continued) The TDS benefit obligation of R19 million has been excluded from the sensitivity analysis below. Current assumption Decrease Increase Rm Rm Rm Medical cost inflation rate 8.0% (1.0%) 1.0% Benefit obligation 4,831 (672) 845 Percentage change (13.9%) 17.5% Service cost and interest cost 2008/ (76) 97 Percentage change (14.6%) 18.6% Discount rate 9.0% (1.0%) 1.0% Benefit obligation 4, (670) Percentage change 17.7% (13.9%) Service cost and interest cost 2008/ (35) Percentage change 7.9% (6.7%) PA(90) Post-retirement mortality rate Ultimate-1 (10.0%) 10.0% Benefit obligation 4, (173) Percentage change 4.1% (3.6%) Service cost and interest cost 2008/ (17) Percentage change 3.6% (3.3%) The fund portfolio consists of the following: Equities (%) Bonds (%) 3 2 Cash and money markets investments (%) Foreign investments (%) 9 9 Insurance policies (%) 8 Telephone rebates Telkom provides telephone rebates to its pensioners. The most recent actuarial valuation was performed as at March 31, Eligible employees must be employed by Telkom until retirement age to qualify for the telephone rebates. The scheme is a defined benefit plan. The status of the telephone rebate liability is disclosed below: ` Rm Rm Rm Present value of unfunded obligation Unrecognised net actuarial loss* (53) (25) (156) Liability as disclosed in the balance sheet (refer to note 28) Telkom Annual Report 2008 Principal actuarial assumptions were as follows: Discount rate (%) Rebate inflation rate (%) Contractual retirement age Average retirement age *The major increase is attributable to the change in the Rebate inflation rate. The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Number of members 19,164 19,515 18,766 Number of pensioners 11,148 10,918 10,680

146 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) Telkom Conditional Share Plan Telkom s shareholders approved the Telkom Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both operational and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting period. The vesting period for the operational employees shares awarded in 2004 and 2005 is 0% in year one, 33% in each of the 3 years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after 3 years. Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may differ based on certain performance conditions being met (Refer note 22). The weighted average remaining vesting period for the shares outstanding as at March 31, 2008 is 1.25 years (2007: 1.75 years; 2006: 1.75 years) The following table illustrates the movement of the maximum number of shares that will vest to employees for the August 2004 grant: Outstanding at beginning of the year 2,943,124 2,414,207 1,883,991 Granted during the year 90 1, Forfeited during the year (67,573) (80,923) (43,790) Vested during the year (17,341) (450,505) (1,419,863) Settled during the year (444,093) Outstanding at end of the year 2,414,207 1,883, ,590 The following table illustrates the movement of the maximum number of shares that will vest to employees for the June 2005 grant: Outstanding at beginning of the year 1,930,687 1,864,041 Granted during the year 2,024,465 1,005 3,469 Forfeited during the year (62,354) (67,651) (108,177) Vested during the year (12,328) (323,946) Settled during the year (19,096) Outstanding at end of the year 1,930,687 1,864,041 1,435,387 The following table illustrates the movement of the maximum number of shares that will vest to employees for the November 2006 grant: Outstanding at beginning of the year 1,773,361 Granted during the year 1,825, Forfeited during the year (52,127) (133,214) Outstanding at end of the year 1,773,361 1,640, The following table illustrates the movement of the maximum number of shares that will vest to employees for the additional November 2006 grant: Outstanding at beginning of the year Granted during the year 4,984,693 Forfeited during the year (172,388) Outstanding at end of the year 4,812,305 The following table illustrates the movement of the maximum number of shares that will vest to employees for the September 2007 grant: Outstanding at beginning of the year Granted during the year 6,117,163 Forfeited during the year (270,527) Outstanding at end of the year 5,846,636

147 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) Telkom Conditional Share Plan (continued) The fair value of the shares granted have been calculated by an actuary using the Black-Scholes-Merton model and the following values at grant date: August 8, June 23, November 2, September 4, 2004 Grant 2005 Grant 2006 Grant 2007 Grant* Market share price ( R) Dividend yield (%) *The same information was used for the November 2006 additional grant The principal assumptions used in calculating the expected number of shares that will vest are as follows: Employee turnover (%) Meeting specified performance criteria (%) Long-term incentive provision The long-term incentive provision represents the present value of the expected future cash outflows to eligible employees that qualify. The amount of the liability is based on an actuarial valuation. The provision is utilised when eligible employees of the Vodacom Group receive the value of vested benefits Rm Rm Rm The Group exposure is 50% of the following items: Net liability at beginning of year Interest cost Current service cost Past service and interest costs 76 Actuarial loss Net cost Total benefit payments (17) (2) (33) Net liability at end of year The amounts for the current and previous four years are as follows: Rm Rm Rm Rm Rm Telkom Pension Fund Defined benefit obligation (190) (186) (281) (205) (204) Plan assets Telkom Annual Report Surplus/(deficit) (38) Asset limitation (29) Unrecognised actuarial loss/(gain) (25) (23) Unrecognised/recognised net asset Experience adjustment on assets Experience adjustment on liabilities 25 (6)

148 Notes to the consolidated annual financial statements (continued) 29. Employee benefits (continued) Telkom Retirement Fund Defined benefit obligation (3,162) (4,020) (4,377) (6,581) (7,101) Plan assets 3,540 4,477 5,973 7,661 7,991 Surplus ,596 1, Unrecognised actuarial gain/(loss) (742) Unrecognised net asset ,176 1,368 Experience adjustment on assets* 1, Experience adjustment on liabilities* 1, Medical benefits Defined benefit obligation (2,378) (3,079) (3,904) (4,384) (4,850) Plan assets 1,961 1,929 Deficit (2,378) (3,079) (3,904) (2,423) (2,921) Unrecognised actuarial (gain)/loss (42) 649 1,297 1,284 1,565 Liability recognised (2,420) (2,430) (2,607) (1,139) (1,356) Experience adjustment on assets 147 (164) Experience adjustment on liabilities Telephone rebates Rm Rm Rm Rm Rm Defined benefit obligation (164) (177) (251) (307) (443) Unrecognised actuarial (gain)/loss (2) Liability recognised (164) (179) (198) (282) (287) Experience adjustment on liabilities (25) 2 *During the March 31, 2007 year end Telkom actuaries have performed a full valuation while for the March 31, 2006 year end a roll forward method was used, as permitted under IAS19, to determine the present value of the benefit obligation and the fair value of the plan assets using the March 31, 2005 statutory valuation as a base applying the relevant assumptions determined by management to arrive at the present value of the benefit obligation, and the fair value of the plan assets. This change in estimate resulted in a movement to the actuarial loss of R700 million and the fair value of the plan assets of R350 million in the respect of the March 31, 2007 estimates. The remaining R1,291 million is a result of the actual investment returns exceeding the expected return for the March 31, 2007 year end. The experience adjustments on asset and liabilities for each of the financial periods ended March 31, 2004, 2005 and 2006 has not been disclosed due to the fact that it was impractical to determine the information Rm Rm Rm Trade and other payables 6,103 7,237 8,771 Trade payables 4,371 5,511 6,768 Finance cost accrued Accruals and other payables 1,591 1,704 1,964 Accruals and other payables mainly represent amounts payable for goods received, net of Value-added Tax obligations and licence fees. Change in comparatives Trade payables have decreased by R125 million in 2007 (2006: RNil) due to the reclassification of the Vodacom DRC put option from trade and other payables to other financial liabilities.

149 Notes to the consolidated annual financial statements (continued) Rm Rm Rm 31. Reconciliation of profit for the year to cash generated from operations 19,724 20,520 21,256 Profit for the year 9,328 8,849 8,172 Finance charges and fair value movements 1,223 1,125 1,803 Taxation 4,523 4,731 4,704 Investment income (397) (235) (197) Interest received from debtors (136) (190) (257) Non-cash items 6,206 6,582 6,930 Depreciation, amortisation, impairment and write-offs 5,876 5,315 6,130 Cost of equipment disposed when recognising finance leases Increase in provisions 554 1, Profit on disposal of property, plant and equipment and intangible assets (79) (29) (147) Profit on disposal of investment and subsidiaries (163) (52) Loss on disposal of property, plant and equipment and intangible assets (Increase)/decrease in working capital (1,023) (342) 101 Inventories (198) (393) (354) Accounts receivable (667) (758) (784) Accounts payable (158) 809 1, Finance charges paid (1,316) (1,115) (1,077) Finance charges per income statement (1,223) (1,125) (1,803) Non-cash items (93) Movements in interest accruals (276) (119) 101 Net discount amortised Fair value adjustment (312) (338) (243) Unrealised gain Taxation paid (4,550) (5,690) (4,277) Net liability at beginning of year (1,711) (1,549) (74) Current taxation (excluding deferred taxation) (3,795) (3,545) (3,807) Foreign currency translation reserve (32) Business combinations (8) Secondary Taxation on Companies (585) (670) (678) Net taxation liability at end of year 1, Telkom Annual Report 2008 Reconciliation of net taxation liability at end of year (1,549) (74) (314) Income tax receivable Income tax payable (1,549) (594) (323) 255

150 Notes to the consolidated annual financial statements (continued) 34. Dividend paid (4,884) (4,784) (5,732) Dividend payable at beginning of year (7) (4) (15) Declared during the year Dividend on ordinary shares: (4,801) (4,678) (5,627) Final dividend for 2005: 400 cents (2,134) Special dividend for 2005: 500 cents (2,667) Final dividend for 2006: 500 cents (2,599) Special dividend for 2006: 400 cents (2,079) Final dividend for 2007: 600 cents (3,069) Special dividend for 2007: 500 cents (2,558) Dividends paid to minorities (80) (117) (110) Dividend payable at end of year Acquisition and disposals of subsidiaries, joint ventures and minority shareholders interests 35.1 Acquisitions By Telkom Africa Online Limited ( Africa Online ) Rm Rm Rm On February 23, 2007 Telkom acquired a 100% shareholding of Africa Online from African Lakes Corporation for a total cost of R150 million, with a resulting goodwill of R145 million. Africa Online is an internet service provider active in Cote d Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Africa Online is incorporated in the Republic of Mauritius. At acquisition date the company was not IFRS compliant and thus no fair value information based on IFRS was available. The process of calculating a fair value of the identified assets, liabilities and contingent liabilities continued after the preceding year end and has now been finalised. The fair value of the assets and liabilities acquired were determined as follows: Fair value of intangible assets (Licences R1 million, Brand R42 million) 43 Less: Deferred taxation raised on intangible assets (12) Less: Net liabilities acquired (excluding fair value of intangible assets) (26) Fair value of net assets acquired 5 Goodwill Purchase price 150 The goodwill has been allocated to the various cash-generating units ( CGU ) representative of the countries in which Africa Online Limited operates. An impairment loss of R12 million was recognised relating to the Tanzanian and Ghana cash-generating units in 2008 in order to write down goodwill to the recoverable amount. The recoverable amount represents the value in use of the CGU s and has been determined using 11.6% discount rate.

151 Notes to the consolidated annual financial statements (continued) 35. Acquisition and disposals of subsidiaries, joint ventures and minority shareholders interests (continued) 35.1 Acquisitions (continued) By the Group s 50% joint venture, Vodacom Smartphone SP (Proprietary) Limited and subsidiaries ( Smartphone SP ) Rm Rm Rm On August 30, 2006 the Vodacom Group acquired a further 19% interest, in addition to the 51% interest already held, in the equity of Smartphone SP. On August 31, 2007 the Vodacom Group increased its interest in the equity of Smartphone SP from 70% to 100%. The acquisition was accounted for using the parent entity extenstion method. Minority interest acquired 11 3 Goodwill Purchase price (including capitalised cost) Less: Capitalised costs payable (1) Purchase price Smartcom (Proprietary) Limited ( Smartcom ) On September 13, 2006 the Vodacom Group increased its interest in Smartcom to 88% by acquiring an additional 2.25% in the equity of Smartcom. On September 1, 2007 the Vodacom Group increased its interest in the equity of Smartcom from 88% to 100%. The acquisition was accounted for using the parent entity extension method. Minority interest acquired (<R1 million) Goodwill 4 9 Purchase price 4 9 The purchase price of R18 million (Group s share: R9 million) was paid on September 6, Africell Cellular Services (Proprietary) Limited Effective October 1, 2006 the Vodacom Group acquired the cellular business of Africell Cellular Services (Proprietary) Limited. The fair value of the assets and liabilities acquired were determined as follows: Fair value of assets acquired 25 Less: Deferred taxation liability (including taxation effect on intangible assets) (7) Fair value of net assets acquired 18 Goodwill 22 Telkom Annual Report Purchase price 40 The customer base was not previously recorded in the accounting records of Africell Cellular Services (Proprietary) Limited as it was an internally generated intangible asset. The goodwill related to the acquisition represents future synergies and the ability to directly control Vodacom Group s customers in South Africa.

152 Notes to the consolidated annual financial statements (continued) 35. Acquisition and disposals of subsidiaries, joint ventures and minority shareholders interests (continued) 35.1 Acquisitions (continued) By the Group s 50% joint venture, Vodacom (continued) InterConnect s.p.r.l Effective November 1, 2006 the Vodacom Group acquired the internet service provider business of InterConnect s.p.r.l. The fair values of the assets and liabilities acquired were determined as follows: Fair value of assets acquired 6 Less: Deferred taxation liability (2) Fair value of net assets acquired 4 Goodwill 6 Purchase price 10 The initial purchase price of R21 million (USD3 million) (Group share: R10 million) excluding capitalised costs was paid on November 1, The goodwill related to the acquisition represents future synergies and are allocated to the Democratic Republic of Congo cash-generating unit Rm Rm Rm Cointel V.A.S. (Proprietary) Limited On August 1, 2005 the Vodacom Group acquired a 51% interest in the equity of Cointel V.A.S. (Proprietary) Limited. On October 4, 2006 the Vodacom Group increased its interest to 100% by acquiring 49% from the minority shareholders. The acquisition was accounted for using the parent entity extention method. The goodwill related to the acquisition represents future synergies and are allocated to the mobile South African cash-generating unit. Fair value of net assets acquired 47 Minority interest (23) 28 Goodwill Purchase price (including capitalised costs) Cash and cash equivalents (42) Cash consideration On October 9, 2006 Smartphone SP (Proprietary) Limited, acquired a 100% shareholding of Cointel V.A.S. (Proprietary) Limited from Vodacom Group (Proprietary) Limited for R300 million (Group share: R150 million). As a result of the sale of Cointel V.A.S. (Proprietary) Limited from Vodacom Group (Proprietary) Limited to Smartphone SP (Proprietary) Limited, R38 million (Group share: R19 million) goodwill was realised, which resulted in the realisation of R17.4 million profit (Group share: R8.7 million) on consolidation.

153 Notes to the consolidated annual financial statements (continued) 35. Acquisition and disposals of subsidiaries, joint ventures and minority shareholders interests (continued) 35.1 Acquisitions (continued) By the Group s subsidiaries One Africa Television (Proprietary) Limited ( One Africa Television ) and Downlink (Proprietary) Limited ( Downlink ) On August 13, 2007 Telkom Media acquired a 49% shareholding in One Africa Television and Downlink respectively, two companies registered in the Republic of Namibia, for a total cost of R18 million. Telkom Media has management control and therefore the entities are consolidated into Telkom Media Group. Purchase price 18 The purchase price allocation will be completed in the 2009 financial year as not all the information was available at year end to finalise it. Goodwill has not been tested for impairment as the accounting is provisional and has not been allocated to the various cash-generating units Rm Rm Rm Multi-Links Telecommunications Limited ( Multi-Links Telecommunications ) On May 1, 2007 Telkom acquired a 75% shareholding in Multi-Links Telecommunications through Telkom International, a wholly owned South African subsidiary, for a total cost of R1,985 million. Multi-Links Telecommunications is a Nigerian Private Telecommunications Operator with a Unified Access License providing fixed, mobile, data, long distance and international telecommunications services throughout Nigeria. Multi-Links is domiciled and incorporated in Nigeria. At this stage Telkom has not taken a decision to dispose of any operations as a result of the combination. At acquisition date the company was not IFRS compliant and thus no fair value information based on IFRS was available. The purchase price allocation has been completed during the current year under review, and has resulted in goodwill being adjusted since the interim results has been released. The following intangible assets were identified and valued at the end of the year: Customer relationship 61 Licence 36 Brand 105 Telkom Annual Report Fair value of intangible assets 202

154 Notes to the consolidated annual financial statements (continued) 35. Acquisition and disposals of subsidiaries, joint ventures and minority shareholders interests (continued) 35.1 Acquisitions (continued) By the Group s subsidiaries (continued) Multi-Links Telecommunications Limited ( Multi-Links Telecommunications ) (continued) The fair value of the assets and liabilities acquired were determined as follows: Net assets acquired (excluding fair value of intangible assets) 236 Fair value of intangible assets 202 Less: Contingencies recognised (35) Less: Deferred taxation raised on intangible assets (65) Fair value of net assets acquired 338 Less: Minority interest (80) Goodwill 1,727 Purchase price* 1,985 *The purchase price was settled in cash. Revenue amounting to R845 million and a profit of R23 million are included in the consolidated annual financial statements, since acquisition date. The factors that lead to goodwill recognised is a combination of premium paid and intangible assets not separately identifiable at acquisition Disposals of Subsidiaries By the Group s 50% joint venture, Vodacom Ithuba Smartcall (Proprietary) Limited ( Ithuba Smartcall ) On September 3, 2007 the Group disposed of its 52% interest in Ithuba Smartcall. The fair value of the assets and liabilities disposed of was less than R1 million Rm Rm Rm Stand 13 Eastwood Road Dunkeld (Proprietary) Limited On September 3, 2007 the Group disposed of its 100% interest in Stand 13 Eastwood Road Dunkeld (Proprietary) Limited. The fair value of the assets and liabilities disposed were as follows: Carrying amount of net assets disposed of: 4 Gain on disposal 4 Selling price The consideration was received on September 6, 2007.

155 Notes to the consolidated annual financial statements (continued) 36. Undrawn borrowing facilities and guarantees 36.1 Rand denominated facilities and guarantees Telkom has general banking facilities of R5,935 million with R41 million utilised at March 31, The facilities are unsecured. When drawn bear interest at a rate linked to prime, have no specific maturity date and are subject to annual review. R2,000 million of these undrawn facilities were committed. The Group exposure is 50% of the following items: Vodacom has Rand denominated credit facilities totalling R5,788 million with R2,456 million utilised as at March 31, The facilities that are uncommitted can also be utilised for loans to foreign entities and are subject to review at various dates (usually on an annual basis). Certain of the facilities are still subject to the Group s final acceptance Guarantor Details Beneficiary Currency Rm Rm Rm Vodacom (Proprietary) Limited All guarantees individually Various less than R2 million. Vodacom Service Provider All guarantees individually Various Company (Proprietary) Limited less than R2 million. Vodacom Service Provider Guarantee in respect of receipt SA Insurance Association Company (Proprietary) Limited of independent intermediaries for benefit of insurers of premiums on behalf of shortterm insurers and Lloyd s underwriters, and relating to short-term insurance business carried on in RSA. Renewable annually. Smartcom (Proprietary) Limited Guarantees for salary bank Various 3 3 account and debit orders. Cointel VAS (Proprietary) Limited Guarantees for operating lease Various 1 and debit orders. Vodacom (Proprietary) Limited Letter of undertaking Attorneys 7 17 in respect of land Foreign denominated facilities and guarantees Telkom SA Limited Punctual payment and Various USD3 million 23 performance by Africa Online under the Trade Finance Facility. Agreement to various banks. First Bank of Nigeria Plc Guarantee on lending facility Nortel Networks USD18 million 147 (on behalf of Multi-Links from Export Bank of Canada to Canada Telecommunications Nortel Networks for the purchase Limited) of Telecommunications equipment phases 9a, 9b, 9c and 9d. Zenith Bank Plc Guarantee payment to Gilat Gilat Satcom USD0.1 million 1 (on behalf of Multi-Links Satcom Limited in respect of Limited Telecommunications interconnect service (standby Limited) letter of credit). Zenith Bank Plc Support the bid award of the NCC USD0.1 million 1 (on behalf of Multi-Links contract for the submission of Telecommunications the proposal to provide wire Limited) Nigerian Telecommunications Services. Zenith Bank Plc Issued in favour of Huawei Huawei Technology USD31 million 250 (on behalf of Multi-Links Technology Investment Company Investment Company Telecommunications Limited for the supply of core Limited Limited) telecommunications services. Zenith Bank Plc Issued in favour of Huawei Huawei Technology USD11 million 88 (on behalf of Multi-Links Technology Investment Company Investment Company Telecommunications Limited for the supply of core Limited Limited) telecommunications services. 510 Telkom Annual Report

156 Notes to the consolidated annual financial statements (continued) 36. Undrawn borrowing facilities and guarantees (continued) 36.2 Foreign denominated facilities and guarantees (continued) The Group exposure is 50% of the following items: Vodacom Congo (RDC) s.p.r.l. has various facilities of USD19 million of which USD9 million was fully utilised as at March 31, Vodacom International Limited has a revolving term loan of USD180 million which was fully utilised at March 31, Vodacom Lesotho (Proprietary) Limited has overdraft facilities with various banks of M40 million of which MNil was utilised at March 31, VM, S.A.R.L. has an overdraft facility of USD0.5 million of which USDNil million was utilised at March 31, Foreign currency term facilities are predominantly US Dollar based, at various maturities and are utilised for bridging and short-term working capital needs Guarantor Details Beneficiary Currency Rm Rm Rm Nedbank on behalf of Unsecured standby Alcatel CIT DNil 86 Vodacom letters of credit (2007: DNil; (Proprietary) Limited 2006: D11 million) Vodacom Group Guarantees issued for Standard Bank Plc USD180 million 1,114 1,312 1,463 (Proprietary)Limited the obligation of Vodacom and RMB (2007: USD180 million; International Limited s International 2006: USD180 million) term loan facility*# (Dublin) Limited Vodacom International Guarantees issued for the Alcatel CIT DNil 38 Limited obligation of Vodacom (2007: DNil; Congo (RDC) s.p.r.l.* 2006: D5 million) 1,238 1,312 1,463 * Foreign denominated guarantees amounting to R1,463 million (2007: R1,312 million; 2006: R1,152 million) issued in support of Vodacom Congo (RDC) s.p.r.l. are included as liabilities in the consolidated balance sheet. # The Group is in compliance with the covenants attached to the term loan facility. Companies within the Group have provided the following guarantees: Vodacom (Proprietary) Limited provides an unlimited guarantee for borrowings entered into by Vodacom Group (Proprietary) Limited Rm Rm Rm 37. Commitments Capital commitments authorised 10,265 11,167 15,198 Fixed-line 6,500 7,000 7,000 Mobile 3,746 4,159 5,211 Other ,987 Commitments against authorised capital expenditure 842 1,099 3, Fixed-line Mobile Other 3 2 2,052 Authorised capital expenditure not yet contracted 9,423 10,068 11,694 Fixed-line 6,302 6,494 6,348 Mobile 3,104 3,568 4,411 Other Capital commitments comprise of commitments for property, plant and equipment and software included in Intangible assets. Management expects these commitments to be financed from internally generated cash and other borrowings.

157 Notes to the consolidated annual financial statements (continued) 37. Commitments (continued) 2010 FIFA World Cup Commitments The FIFA World Cup commitments is an executory contract which requires Telkom to develop the fixed-line components of the necessary telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of the fixed-line telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the planning, management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and services. Furthermore as a National Supporter, Telkom owns a tier 3 sponsorship that grants Telkom a package of advertising, promotional and marketing rights that are exercisable within the borders of South Africa. The total value of the commitment for the year ended March 31, 2008 amounted to USD35 million. Operating lease commitments and receivables Total <1 year 1 5 years >5 years Rm Rm Rm Rm 2008 Buildings 2, Rental receivable on buildings (266) (94) (169) (3) Transmission and data lines Vehicles 1, ,211 Equipment Sport and marketing contracts Customer premises equipment receivables (84) (45) (39) Total 4, , Buildings 1, Rental receivable on buildings (269) (91) (174) (4) Transmission and data lines Vehicles Equipment Sport and marketing contracts Customer premises equipment receivables (57) (30) (27) Total 2, , Buildings Rental receivable on buildings (180) (56) (122) (2) Transmission and data lines Vehicles Equipment Sport and marketing contracts Total 2, ,551 9 Telkom Annual Report Customer premises equipment receivables The disclosed information relates to those arrangements which were assessed to be operating leases in terms of IAS17. The comparative information for 2006 is not disclosed as it was not considered to be material.

158 Notes to the consolidated annual financial statements (continued) 37. Commitments (continued) Operating leases The Group leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are ten years with other leases signed for five and three years. The bulk of non-equipment related premises are for leases of three years to ten years. The majority of the leases normally contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the main lease term. The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%. Penalties in terms of the lease agreements are only payable should Telkom vacate a premises and negotiate to terminate the lease agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises. Future minimum lease payments under operating leases are included in the above note. Onerous leases for buildings, of which Telkom has no further use, no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions. The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in the lease expiring on March 31, During August 2007 new terms were negotiated and approved and as a result the operating lease commitments for vehicles are based on the new agreement which expires on March 31, In accordance with this agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the five year period except for the rentals at airport which are utilised in cases of subsistence and travel as well as vehicles which are not part of the agreement. The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new similar vehicle, the lease costs of the newest vehicle, will increase by the Consumer Price Index. All leased vehicles are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank. The leases of individual vehicles are renewed annually. The increase in the current year transmission and data line is attributable to Vodacom increasing their operating leases. The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25, In terms of these agreements the leases of individual equipment shall be valid for 36 months at a fixed fee for the entire period. Total <1 year 1 5 years >5 years Rm Rm Rm Rm Finance lease commitments 2008 Building Minimum lease payments 2, ,150 Finance charges (1,029) (43) (603) (383) Finance lease obligation 1, Equipment Minimum lease payments Finance charges (2) (2) Finance lease obligation Vehicles* Minimum lease payments Finance charges (59) (20) (39) 264 Finance lease obligation Building Minimum lease payments 2, ,332 Finance charges (1,198) (166) (540) (492) Finance lease obligation 1, Equipment Minimum lease payments 6 6 Finance charges Finance lease obligation 6 6 *The finance lease commitments disclosed above are future commitments commencing April 1, Thus not recognised as interest-bearing debt.

159 Notes to the consolidated annual financial statements (continued) 37. Commitments (continued) Finance lease commitments (continued) Total <1 year 1 5 years >5 years Rm Rm Rm Rm 2006 Building Minimum lease payments 2, ,519 Finance charges (1,372) (172) (587) (613) Finance lease obligation 1, Finance leases Finance leases on vehicles relates to the lease of Swap bodies. Swap bodies are detachable parts of the vehicle, designed according to Telkom specifications, which are used as mobile storage. The lease term for the Swap bodies which have been classified as finance leases and vehicles which have been classified as operating leases has been renewed from April 2008 to April A major portion of the finance leases relates to the sale and lease-back of the Group s office buildings. The lease term negotiated for the buildings is for a period of 25 years ending The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the right to sublet part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages. Finance charges accruing on one of the Group s building leases exceed the lease payments for the next three years. Minimum lease payments for the next five years do not result in any income accruing to the Group. Finance leases on equipment relates to the reclassification of operating leases as the result of Telkom adopting IFRIC4, which requires assessment of whether an arrangement contains a lease. These leases are classified as finance leases in terms of IAS17 since they transfer significant risks and rewards of ownership to Telkom. Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for a period of 3 years ending in Other The group exposure is 50% of the following items: Global Alliance fees The Vodacom Group pays annual fees from February 18, 2005 for the services provided by Vodafone Group Plc. The fee is calculated as a percentage of revenue and amounts to R304 million (2007: R250 million; 2006: R175 million). Retention incentives The Vodacom Group has committed a maximum of R1,317 million (2007: R652 million; 2006: R456 million) in respect of customers already beyond their normal 24 month contract period, but who have not yet upgraded to new contracts, and therefore have not utilised the incentive available for such upgrades. The Group has not recognised the liability, as no legal obligation exists, since the customers have not yet entered into new contracts. Activation bonuses The Vodacom Group has a potential liability in respect of activation bonuses payable related to starter packs sold which have not yet been validated. The exposure is estimated at approximately R14 million (2007: R8 million; 2006: R9 million). Activation commissions The Vodacom Group has a commitment to a maximum of R119 million (2007: R116 milllion; 2006: R142 million) in terms of activation commissions on gross prepaid connections in excess of the legal liability recorded in the financial statements. Telkom Annual Report

160 Notes to the consolidated annual financial statements (continued) 38. Contingencies Third parties Fixed-line Mobile Other Third parties These amounts represent sundry disputes with suppliers that are not individually significant and that the Group does not intend to settle. Supplier dispute Rm Rm Rm Expenditure of R594 million was incurred up to March 31, 2002 for the development and installation of an integrated end-to-end customer assurance and activation system to be supplied by Telcordia. In the 2001 financial year, the agreement with Telcordia was terminated and in that year, Telkom wrote off R119 million of this investment. Following an assessment of the viability of the project, the balance of the Telcordia investment was written off in the 2002 financial year. During March 2001, the dispute was taken to arbitration where Telcordia was seeking approximately USD130 million plus interest at a rate of 15.5% per year which was subsequently increased to USD172 million plus interest at a rate of 15.5% per year in the 2007 financial year for money outstanding and damages. The claims have since been revised by Telcordia to USD128 million. The parties have since reached an advanced stage in their preparation to determine the quantum payable by Telkom to Telcordia. Following the ruling by the Constitutional Court, two hearings were held at the International Dispute Resolutions Centre (IDRC). The first hearing was held in London on May 21, 2007 and was a directions hearing in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the quantum hearing. In the second hearing in London at the IDRC on June 25 and 26, 2007 the arbitrator set out a list of issues for determination of the damages. At a subsequent hearing during July 2007 in London the arbitrator ruled that the rate in terms of the Prescribed Rate of Interest will apply on both damages and debt claims, permitted Telcordia to a further amount to Telcordia s existing claims, permitted VAT to be claimed on Telcordia s claim, where applicable, and set out an agreed timetable for the future conduct of proceedings. A mediation took place, without success, during February and April In the interim the parties have agreed to the appointment by the arbitrator of a third party expert to deal with the technical issues in relation to the software that was required to be provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. The arbitrator confirmed certain dates for the compliance of precedural steps to be taken by all the parties before final dates could be agreed upon for a hearing of the evidence on the quantum. A provision has been raised based on management s best estimate of the probable payments in this regard Rm Rm Rm Supplier dispute liability included in current portion of provisions * For the net increase in the provision refer to note * USD70 million. Competition Commission If found guilty Telkom could be required to cease these practices, divest these businesses and a maximum administrative penalty of up to 10%, calculated with reference to Telkom s annual turnover, excluding the turnover of subsidiaries and joint ventures, for the financial year prior to the complaint date, may be imposed if it is found that Telkom has committed a prohibited practice as set out in the Competition Act, 1998 (as amended). The Competition Commissions has to date not imposed the maximum penalty on any offender.

161 Notes to the consolidated annual financial statements (continued) 38. Contingencies (continued) Competition Commission (continued) This applies to the following cases: Independent Cellular Service Provider Association of South Africa ('ICSPA') This is a complaint in terms of the Competition Act, which was brought in ICSPA alleged that Telkom had entered into contracts with large corporations, providing large discounts with the effect of the discouraging the corporates from using the premicell device installed by their members. ICSPA alleged various contraventions of the Act. Telkom provided the Competition Commission with certain information requested. Telkom also referred the Competition Commission to it's High Court application in respect of utilisation of the 'premicell' device. The Competition Commission declined to refer the matter to the Competition Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003 but has done nothing since, notwithstanding that Telkom filed its answering affidavit on November 28, ICSPA has taken no further action since then. The South African Value Added Network Services ( SAVA ) On May 7, 2002 SAVA, an association of Value Added Network Services (VANS) providers, filed complaints against Telkom at the Competition Commission Competition Act, 89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in contravention of the Competition Act, 89 of 1998, and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of Telkom s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal for adjudication. The referred complaints deal with Telkom s alleged refusal to provide telecommunications facilities to certain VANS providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with certain VANS providers. Telkom brought an application for review against the Competition Commission and the Competition Tribunal in the High Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. Telkom is of the view that the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that the Independant Communications Authority of South Africa ( ICASA ) has the requisite jurisdiction. Only the Competition Commission opposed the application and filed an answering affidavit. The application for review was heard on April 24 and 25, The High Court Judge agreed with Telkom s arguments and set aside the decision of the Competition Commission to refer the SAVA complaints (and the Omnilink complaint against Telkom discussed below) to the Competition Tribunal. The decision was made based on three grounds: The Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the Competition Commission and ICASA; The referral was out of time; The Competition Commission s reliance on a report by the Link Centre created a reasonable apprehension of bias, since some of the complainants contribute financially to the Link Centre and the Link Centre s advisory board includes employees of the complainants in the SAVA complaints. The Judge did not make a decision on the matter of jurisdiction (whether ICASA or the Competition Tribunal has the right to rule on the competition matters in the communications industry). To date, the Competition Commission has not appealed the High Court ruling. Omnilink Omnilink alleged that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom IVPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter discussed above. Orion/Telkom (Standard Bank and Edcon): Competition Tribunal In April 2003, Orion filed a complaint against Telkom, Standard Bank, and Edcon at the Competition Commission concerning Telkom offering discounts on public switched telecommunication services to corporate customers. In terms of the rules of the Competition Commission, the Competition Commission, who acts as an investigator, has one year to investigate the complaint. Orion simultaneously with the filing of the complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and restraining Telkom from offering Orion s corporate customers reduced rates associated with Telkom s Cellsaver discount plan. Telkom Annual Report

162 Notes to the consolidated annual financial statements (continued) 38. Contingencies (continued) Competition Commission (continued) Orion/Telkom (Standard Bank and Edcon): Competition Tribunal (continued) The Competition Commission completed its investigation and decided that there was no prima facie evidence on any contravention of the Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the main complaint before the Competition Tribunal. To date there has been no further developments on this matter. The Internet Service Providers Association ( ISPA ) In December 2005, ISPA, an association of Internet Service Providers ( ISPs ), filed complaints against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. The complaints deal with the cost of access to the South African Internet Exchange ( SAIX ), the prices offered by TelkomInternet, the alleged delay in provision of facilities to ISP s and the alleged favourable installation timelines offered to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects of the complaint. Telkom has provided the Competition Commission with the information and is awaiting the Commissions response. M-Web and Internet Solutions ( IS ) On June 29, 2005 M-Web and IS jointly lodged a complaint with the Competition Commission against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with Telkom s pricing for ADSL retail products and its IP Connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of SAIX bandwidth for ADSL users of other ISP s, the architecture of the ADSL access route and the manner in which ISP s can only connect to the ESR via IP Connect as well as alleged excessive pricing for bandwidth on the international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS and Telkom in terms of the current peering agreement, and demanded that Telkom treat traffic generated by the ADSL customers of M-Web as traffic destined for the peering link and that Telkom upgrades the peering link to accommodate the increased ADSL traffic emanating from M-Web and maintain a maximum of 65% utilisation. Telkom filed its answering affidavit, and is awaiting IS/M-Web s replying affidavit. Since then Telkom has entered into a new peering agreement with IS and has responded to numerous documentation and information requests. To date there has been no further movement on this matter, either in the filing of a replying affidavit by IS/M-Web in the interim relief application or in the investigation of the matter by the Competition Commission. 268 M-Web On June 5, 2007 M-Web brought an application against Telkom for interim relief at the Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet connections. M-Web requested the Competition Tribunal to grant an order of interim relief against Telkom to charge M-Web a wholesale price for the provision of ADSL internet connections which is not higher than the lowest retail price. M-Web further applied for an order that Telkom implement the migration of end customers from Telkom PSTS (ADSL access) to M-Web without interruption of the service. Although Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to plead over as to the merits of the matter. Telkom also filed an application in the Transvaal Provincial Division of the High Court on July 3, 2007 for an order declaring that the Competition Tribunal does not have jurisdiction to hear the application made to it by M-Web. This application has been set down for hearing during the first quarter of the 2009 financial year. The parties have entered into settlement negotiations, which resulted in the withdrawal of the interim relief application by M-Web as well as withdrawal of the jurisdictional challenge by Telkom. The parties are in further negotiations. Salary negotiations Telkom is a party to a collective agreement on substantive matters covering the terms and conditions of employment of its fixed-line unionised employees and other non-management employees in Telkom s bargaining unit with ATU and CWU for the period from April 1, 2006 to March 31, The long term substantive agreement provides for the re-opening of negotiations in the event the consumer price index varies from the April 2006 level of 3.7% by more than 3%. Due to inflation increasing beyond this amount, Telkom re-opened the negotiations in December 2007and thus far, we have not managed to reach settlement. Given the current economic conditions, the various Trade Union Federations especially COSATU have requested a double-digit increase. If Telkom is unable to implement workforce reductions as necessary or outsourcing as planned, particularly as a result of increased competition, or experience significant labour disputes, work stoppages, increased employee expenses as a result of collective bargaining or compliance with labour laws, Telkom s business operations could be disrupted and our net profit could be reduced.

163 Notes to the consolidated annual financial statements (continued) 38. Contingencies (continued) Negative working capital ratio At each of the financial periods ended March 31, 2008, 2007 and 2006 Telkom had a negative working capital ratio. A negative working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings and borrowings available under existing credit facilities. The Group s exposure is 50% of the following items: Equity investment The Vodacom Group through Vodacom Ventures (Proprietary) Limited has acquired a 35% equity stake in a X-Link Communications (Proprietary) Limited R12 million, which is subject to Competition Commission approval. The Board of Vodacom Group (Proprietary) Limited has also approved the exercise of the option to acquire a further 15.5% equity investment in WBS Holdings (Proprietary) Limited should certain suspensive conditions be fulfilled. Customer registration The telecommunications industry in the Democratic Republic of the Congo is subject to a recently promulgated ministerial decree requiring the registration of the entire customer base of all network operators. This decree requires prescribed particulars of all customers to be obtained and maintained by June 30, The sanction for non-compliance by any operator who has not identified its customers in accordance with the requirements of this decree within three months from March 28, 2008 could result in: a fine equivalent to between USD5 thousand and USD10 thousand per customer; and suspension of the licence for a period not exceeding three months in the event of repetition; and suspension of the licence in the event of a likely disturbance of law and order/safety. The Group is making every effort to obtain the required information but management believes it is unlikely that the Group will meet all the requirements as prescribed in this decree by June 30, Management is engaging with the relevant ministries on this matter and are presently unable to reliably assess the potential impact on the Group in the event of non-compliance with this decree. The Group would be entitled to 50% of the following item: Contingent Asset Litigation is being instituted for the recovery of certain fees paid by the Vodacom Group. The information usually required by IAS37 Provisions, Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be expected to prejudice seriously the outcome of the litigation. The directors are of the opinion that a claim may be successful and that the amount recovered could be significant. 39. Directors interest DD Tabata, one of Telkom s Board members is a director and shareholder of Vuwa Investments (Proprietary) Limited which acquired a 40% interest in SAIL Group Limited, with effect from October 1, SAIL Group Limited is a sports marketing company that does business with Telkom. Telkom paid R17,094,884 for the financial year for these goods and services (2007: R18,682,568). The outstanding creditor s balance in Telkom at March 31, 2008 was R855,000 (2007: R151,924). Vodacom paid R592,474,403 for goods and services from the SAIL Group (2007: R599,958,860). The outstanding creditor s balance in Vodacom as at March 31, 2008 was R21,260,584 (2007: R18,951,705). Vuwa Investments is a consortium member of Amandla Omoya, who has bid to acquire a 10% stake in Vodacom. SL Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of Telkom s board members, are the South African Government s representatives on Telkom s Board of Directors. At March 31, 2008 the Government held 39.42% (2007: 38.83%; 2006: 37.99%) of Telkom s shares. As at March 31, 2008 A Rhoda (B Molefe resigned March 5, 2008; T. Mahloele resigned on January 30, 2008) was the Public Investment Corporation ( PIC ) representative on Telkom s Board of Directors. As at March 31, 2008 the PIC held 15.23% (2007: 15.27%; 2006: 15.73%) of Telkom s shares. On July 3, 2008 A Rhoda resigned and was replaced by B Molefe. Beneficial Non-beneficial Number of shares Direct Indirect Direct Indirect Telkom Annual Report Directors shareholding 2008 Executive RJ September 7,155 Total 7, Non-executive TF Mosololi 455 Total 455

164 Notes to the consolidated annual financial statements (continued) Beneficial Non-beneficial Number of shares Direct Indirect Direct Indirect 39. Directors interest (continued) Directors shareholding (continued) 2006 Non-executive NE Mtshotshisa 88 TF Mosololi 455 Total The directors shareholding did not change between the balance sheet date and the date of issue of the financial statements Rm Rm Rm Directors emoluments Executive For other services Non-executive For services as directors Emoluments per director: Fringe Performance and other Fees Remuneration bonus benefits Total R R R R R Non-executive 4,633,933 4,633, SL Arnold 1,124,373 1,124,373 B du Plessis 393, ,967 MJ Lamberti PSC Luthuli 502, ,117 TD Mahloele 357, ,684 KST Matthews 501, ,217 TF Mosololi 174, ,960 M Mostert # 229, ,433 DD Tabata 250, ,583 YR Tenza 305, ,633 PL Zim 5,333 5,333 B Molefe 20,497 20,497 A Rhoda 14,286 14,286 RJ Huntley 193, ,833 E Spio-Garbrah** 273, ,841 Dr. VB Lawrence** 286, ,176 Executive 14,489,833 3,436,308 13,244,896 31,171,037 RJ September* 2,453,757 3,436,308 13,218,772 19,108,837 CEO 1,016,524 3,436,308 10,438,538 14,891,370 Acting CEO 1,437,233 2,780,234 4,217,467 LRR Molotsane* 12,036,076 26,124 12,062,200 Total emoluments paid by Telkom 4,633,933 14,489,833 3,436,308 13,244,896 35,804,970

165 Notes to the consolidated annual financial statements (continued) 39. Directors interest (continued) Directors emoluments 2007 Emoluments per director: Fringe Performance and other Fees Remuneration bonus benefits Total R R R R R Non-executive 2,641,168 2,641,168 NE Mtshotshisa 463, ,050 SL Arnold 353, ,719 TCP Chikane 32,670 32,670 B du Plessis 213, ,367 PSC Luthuli 205, ,417 TD Mahloele 166, ,667 KST Matthews 109, ,643 TF Mosololi 214, ,417 M Mostert 232, ,417 DD Tabata 175, ,367 YR Tenza 321, ,767 PL Zim 152, ,667 Executive 2,272,785 1,653,202 3,925,987 LRR Molotsane* 2,272,785 1,653,202 3,925,987 Total emoluments paid by Telkom 2,641,168 2,272,785 1,653,202 6,567, Emoluments per director: Non-executive 2,969,158 2,969,158 NE Mtshotshisa 759, ,500 TCP Chikane 181, ,022 B du Plessis 254, ,391 PSC Luthuli 168, ,357 TD Mahloele 223, ,227 TF Mosololi 230, ,809 M Mostert 308, ,272 A Ngwezi 47,727 47,727 DD Tabata 323, ,022 YR Tenza 349, ,022 PL Zim 123, ,809 Executive 2,186,460 7,070,262 2,990,865 12,247,587 LRR Molotsane* 1,250,747 3,442, ,675 5,602,995 SE Nxasana 935,713 3,627,689 2,081,190 6,644,592 Telkom Annual Report Total emoluments paid by Telkom 2,969,158 2,186,460 7,070,262 2,990,865 15,216,745 *Included in fringe and other benefits is a pension contribution for LRR Molotsane of R4,690 (2007: R295,462; 2006: R162,597), as well as a pension contribution for RJ September of R280,261 paid to the Telkom Retirement Fund, and a payment made in terms of a restraint of trade agreement. Included in remuneration for LRR Molotsane is a payment pursuant to a settlement agreement with Telkom. LRR Molotsane resigned from Telkom in April 2007 and RJ September was appointed CEO during November **Foreign Directors. # In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the Telkom Board resolved that it was in the best interest of the company and shareholders to deploy the highest quality skills currently resident in Telkom, to evaluate, structure and make recommendations to the Board on major transactions. During the year M Mostert led all efforts in this regard and was remunerated accordingly. Moreover in compliance with the principles of good governance, the Board took legal advice and established that there was not conflict of interest arising out of his involvement in the transaction evaluated.

166 Notes to the consolidated annual financial statements (continued) 40. Segment information Eliminations represent the inter-segmental transactions that have been eliminated against segment results Rm Rm Rm Business Segment Consolidated operating revenue 47,625 51,619 56,285 Fixed-line 31,832 32,345 32,572 Elimination (737) (772) (830) Mobile 17,021 20,573 24,089 Elimination (1,435) (1,494) (1,519) Other ,993 Elimination (8) (12) (20) Consolidated other income Fixed-line Elimination (45) (46) (86) Mobile Elimination Other Elimination Consolidated operating expenses 33,428 37,533 42,337 Fixed-line 22,454 24,083 24,962 Elimination (1,443) (1,495) (1,709) Mobile 12,635 15,185 17,898 Elimination (710) (755) (805) Other* ,115 Elimination (72) (74) (124) Consolidated operating profit 14,677 14,470 14,482 Fixed-line 9,843 8,596 8,107 Elimination Mobile 4,436 5,430 6,247 Elimination (725) (739) (714) Other (55) Elimination Consolidated investment income Fixed-line 2,720 3,041 3,975 Elimination (2,398) (2,850) (3,832) Mobile Other Consolidated finance charges 1,223 1,125 1,803 Fixed-line ,277 Mobile Other 320 Elimination (34) Consolidated taxation 4,523 4,731 4,704 Fixed-line 2,836 2,652 2,630 Mobile 1,542 1,918 2,055 Other

167 Notes to the consolidated annual financial statements (continued) 40. Segment information (continued) Business Segment (continued) Rm Rm Rm Minority interests Mobile Other Profit attributable to equity holders of Telkom 9,189 8,646 7,975 Fixed-line 8,888 8,129 8,175 Elimination (1,737) (2,173) (3,039) Mobile 2,516 3,170 3,906 Elimination (725) (739) (714) Other (491) Elimination Operating expenses* Other 2,115 Prior to consolidation adjustments 1,830 Consolidation adjustments 285 Consolidated assets 54,306 57,426 68,259 Fixed-line 43,121 44,224 47,829 Elimination (1,598) (1,547) (1,604) Mobile 12,263 14,026 16,743 Elimination (258) (353) (278) Other 905 1,188 5,734 Elimination (127) (112) (165) Investments 2,963 1,461 1,499 Fixed-line 3,093 1,621 4,917 Elimination (232) (341) (3,607) Mobile Other 13 Other financial assets Fixed-line Mobile Other 1 Total assets 57,544 59,146 70,372 Consolidated liabilities 15,171 15,951 19,689 Fixed-line 10,285 10,154 11,892 Elimination (351) (458) (495) Mobile 6,466 7,416 8,871 Elimination (1,441) (1,468) (1,542) Other Elimination (107) (67) (8) Telkom Annual Report Interest-bearing debt 11,123 10,364 15,733 Fixed-line 9,888 9,082 13,362 Mobile 1,234 1,278 1,815 Other Other financial liabilities ,290 Fixed-line Mobile Other

168 Notes to the consolidated annual financial statements (continued) 40. Segment information (continued) Business Segment (continued) Tax liabilities 1, Fixed-line 1,186 7 Mobile Other Total liabilities 28,078 27,138 37,035 Other segment information Capital expenditure for property, plant and equipment 6,310 8,648 10,108 Fixed-line 3,926 5,545 6,044 Mobile 2,350 3,069 2,475 Other ,589 Capital expenditure for intangible assets 1,196 1,598 1,791 Fixed-line 974 1, Mobile Other Depreciation and amortisation 5,714 5,019 5,601 Fixed-line 4,176 3,298 3,470 Mobile 1,498 1,681 1,955 Other Impairment and asset write-offs Fixed-line Mobile (26) Other Workforce reduction expense Fixed-line Geographical segment Rm Rm Rm Consolidated operating revenue 47,625 51,619 56,285 South Africa 46,154 49,558 52,668 Other African countries 1,487 2,099 3,653 Eliminations (16) (38) (36) Consolidated operating profit 14,677 14,470 14,482 South Africa 14,665 14,366 14,343 Other African countries Eliminations (119) (190) (106) 274 Consolidated assets 57,544 59,146 70,372 South Africa 56,479 56,797 63,772 Other African countries 2,015 3,489 8,785 Eliminations (950) (1,140) (2,185) Capital expenditure for property, plant and equipment and intangible assets* 7,506 10,246 11,899 South Africa 7,135 9,459 9,780 Other African countries ,119 South Africa, which is also the country of domicile for Telkom, comprises the segment information relating to Telkom and its South African subsidiaries as well as Vodacom s South African-based mobile communications network, the segment information of its service providers. Other African countries comprises Telkom s subsidiaries Africa Online Limited and Multi-Links Telecommunications Limited as well as Vodacom s mobile communications network in Tanzania, Lesotho, the Democratic Republic of the Congo and Mozambique. *The Geographical segment capital expenditure has been restated to include capital expenditure on intangible assets.

169 Notes to the consolidated annual financial statements (continued) Rm Rm Rm 41. Related parties Details of material transactions and balances with related parties not disclosed separately in the consolidated annual financial statements were as follows: With joint venture: Vodacom Group (Proprietary) Limited Related party balances Trade receivables Trade payables (256) (353) (346) Related party transactions Revenue (710) (755) (816) Expenses 1,435 1,494 1,525 Audit fees Revenue includes interconnect fees and lease and installation of transmission lines Expenses mostly represent interconnect expenses With shareholders: Government Related party balances Trade receivables Related party transactions Revenue (2,304) (2,458) (2,623) With entities under common control: Major public entities Related party balances Trade receivables Trade payables (2) (6) (25) The outstanding balances are unsecured and will be settled in cash in the ordinary course of business Related party transactions Revenue (370) (435) (486) Expenses Rent received (17) (29) (21) Rent paid Telkom Annual Report

170 Notes to the consolidated annual financial statements (continued) 41. Related parties (continued) Key management personnel compensation: (Including directors emoluments) Rm Rm Rm Related party transactions Short-term employee benefits Post-employment benefits Termination benefits Equity compensation benefits Other long-term benefits The fair value of the shares that vested in the current year is R12 million (2007: RNil; 2006: R3 million). Terms and conditions of transactions with related parties The sales to and purchases from related parties of telecommunication services are made at arms length prices. Except as indicated above, outstanding balances at the year-end are unsecured, interest free (except for interest charged on overdue telephone accounts) and settlement occurs in cash. Apart from the bank guarantee to the amount not exceeding R23 million (USD3 million) provided to Africa Online, there have been no guarantees provided or received for related party receivables or payables. Except as indicated above for the year ended March 31, 2008 the Group has not made any impairment of amounts owed by related parties (2007: RNil; 2006: RNil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates. 42. Investments in joint ventures Vodacom Group (Proprietary) Limited ( Vodacom ) Telkom owns 5,000 shares of 1c each at cost. This amounts to a 50% shareholding in Vodacom. Vodacom is an entity that is jointly controlled by its venturers, Telkom and Vodafone Plc through a contractual agreement. Telkom applies joint venture accounting in recognising its investment in Vodacom since it shares control of Vodacom with Vodafone, as set out in the joint venture agreement between the two parties, and has chosen to proportionately consolidate Vodacom on a line-by-line basis. Some of the provisions in the joint venture agreement that indicate how the venturers jointly control the activities of Vodacom are as follows: The venturers have the right to appoint the 8 non-executive directors of Vodacom. A further 4 executive directors are appointed to the Board; A Directing committee has been established that holds all powers, functions and authority of the directors to act for and on behalf of the Company. This Directing committee constitutes only the directors as appointed by the venturers; All decisions made by the Directing committee are mandatorily ratified by the Board of Directors as the ultimate decision lies with the Directing committee; and The Directing committee, which is composed entirely of venturer appointed directors, is the ultimate oversight committee of, and controls the activities of, Vodacom. 276

171 Notes to the consolidated annual financial statements (continued) 42. Investments in joint ventures (continued) Rm Rm Rm Total assets 12,384 14,235 17,087 Non-current assets 8,040 10,422 12,234 Current assets 4,344 3,813 4,853 Total liabilities and reserves (12,384) (14,235) (17,087) Reserves (4,196) (4,713) (5,703) Minority interests (142) (110) (202) Non-current liabilities (932) (1,906) (2,394) Current liabilities (7,114) (7,506) (8,788) The Group s proportionate share of revenue and expense is as follows: Revenue 17,021 20,573 24,089 Net operating expenses (12,586) (15,142) (17,844) Profit before net finance charges 4,435 5,431 6,245 Net finance charges (320) (233) (212) Net income before taxation 4,115 5,198 6,033 Taxation (1,542) (1,918) (2,055) Profit after taxation 2,573 3,280 3,978 Minority interest (58) (109) (73) Net profit for the year 2,515 3,171 3,905 The Group s proportionate share of cash flow is as follows: Cash flow from operating activities 2,251 2,429 2,562 Cash flow from investing activities (2,395) (3,292) (3,751) Cash flow from financing activities (53) (100) 1,617 Net (decrease)/increase in cash and cash equivalents (197) (963) 428 Effect of exchange rate on cash and cash equivalents (8) Cash and cash equivalent at beginning of year 1, (54) Cash and cash equivalents at end of year 880 (54) 418 Telkom Annual Report

172 Notes to the consolidated annual financial statements (continued) 43. Interest in subsidiaries Country of incorporation: RSA Republic of South Africa; TZN Tanzania; LES Lesotho; MZ Mozambique; DRC Democratic Republic of Congo; MAU Mauritius; NIG Nigeria Nature of business: C Cellular; S Satellite; MSC Management services company; PROP Property company; OTH Other. *Dormant at March 31, Directory advertising (OTH) Issued share capital Interest in issued ordinary share capital Country of incorporation % % % TDS Directory Operations (Proprietary) Limited RSA R100,000 R100,000 R100, Data application services (OTH) Swiftnet (Proprietary) Limited RSA R25,000,000 R5,000,000 R5,000, Other (OTH) Q-Trunk (Proprietary) Limited RSA R10,001,000 R10,001,000 R10,001, Intekom (Proprietary) Limited RSA R10,001,000 R10,001,000 R10,001, Rossal No 65 (Proprietary) Limited RSA R100 R100 R Acajou Investments (Proprietary) Limited RSA R100 R100 R Telkom Media (Proprietary) Limited RSA R100 R Africa Online Limited MAU USD1,000 USD1, Multi-Links Telecommunications Limited NIG N300,000, Telkom International (Proprietary) Limited (MSC) RSA R100 R100 R The aggregate net (loss)/profit of the subsidiaries is (R186) million (2007: R564 million; 2006: R471 million) Vodacom has an interest in the following companies (Group Share: 50% of the interest in ordinary share capital as indicated): Cellular network operators Vodacom (Proprietary) Limited (C) RSA R100 R100 R Vodacom Lesotho (Proprietary) Limited (C) LES M4,180 M4,180 M4, Vodacom Tanzania Limited (C) TZN TZS10,000 TZS10,000 TZS10, VM, S.A.R.L. (C) MZ USD60,000,000 USD60,000,000 USD60,000, Vodacom Congo (RDC) s.p.r.l. (C) DRC USD1,000,000 USD1,000,000 USD1,000, Service providers 278 Vodacom Service Provider Company (Proprietary) Limited (C) RSA R20 R20 R Smartphone SP (Proprietary) Limited (C)* RSA R20,000 R20,000 R 20, Smartcom (Proprietary) Limited (C)* RSA R1,000 R1,000 R 1, Cointel VAS (Proprietary) Limited (C)* RSA R10,204 R10,204 R 10,

173 Notes to the consolidated annual financial statements (continued) Interest in issued Issued share capital ordinary share capital Country of incorporation % % % 43. Interest in subsidiaries (continued) Other subsidiaries of the Group s Joint Venture Vodacom Service Provider Holdings Company (Proprietary) Limited (MSC)* RSA R1,020 R1,020 R1, Vodacom Satellite Services (Proprietary) Limited (OTH)* RSA R100 R100 R GSM Cellular (Proprietary) Limited (OTH)* RSA R1,200 R1,200 R1, Vodacom Venture No.1 (Proprietary) Limited (OTH)* RSA R810 R810 R Vodacom Equipment Company (Proprietary) Limited (OTH)* RSA R100 R100 R Vodacare (Proprietary) Limited (OTH)* RSA R100 R100 R Vodacom International Holdings (Proprietary) Limited (MSC) RSA R100 R100 R Vodacom International Limited (MSC) MAU USD100 USD100 USD Vodacom Properties No.1 (Proprietary) Limited (PROP) RSA R100 R100 R Vodacom Properties No.2 (Proprietary) Limited (PROP) RSA R1,000 R1,000 R1, Stand 13 Eastwood Road Dunkeld West (Proprietary) Limited (PROP) RSA R100 R Ithuba Smartcall (Proprietary) Limited (OTH) RSA R100 R Smartcall Smartlife (Proprietary) Limited (OTH) RSA R Vodacom Tanzania Limited (Zanzibar) (OTH)* TZN TZS10,000 TZS10,000 TZS10, Joycell Shops (Proprietary) Limited (OTH)* RSA R100 R100 R Marble Gold Investments (Proprietary) Limited (OTH)* RSA R100 R100 R Vodacom Ventures (Proprietary) Limited (OTH) RSA R120 R120 R Skyprops 134 (Proprietary) Limited (PROP) RSA R100 R Indebtness of Telkom subsidiary companies Rm Rm Rm Swiftnet (Proprietary) Limited RSA 2 Intekom (Proprietary) Limited RSA 3 Q-Trunk (Proprietary) Limited RSA Rossal No 65 (Proprietary) Limited RSA 30 Acajou Investments (Proprietary) Limited RSA Africa Online Limited MAU 74 Multi-Links Telecommunications Limited NIG 841 Telkom Media (Proprietary) Limited RSA 326 Telkom Annual Report

174 Notes to the consolidated annual financial statements (continued) 44. Significant events Swiftnet (Proprietary) Limited Swiftnet is in breach of its licence that requires it to have at least 30% of its shares held by black economic empowerment individuals or entities. ICASA has required Swiftnet to remedy the breach of its licence, which expired on August 24, On February 14, 2007 Telkom announced that it had entered into an agreement to sell a 30% stake in Swiftnet to the Radio Surveillance Consortium, a group of empowerment investors, for R55 million following a competitive sale process run by an independent adviser. The transaction would not have required any financial support or facilitation from Telkom. The transaction received Competition Commission approval on May 28, 2007, but was not approved by ICASA. Swiftnet is currently seeking black economic empowered individuals or entities who would be acceptable to ICASA. Swiftnet met with ICASA on January 28, 2008 to discuss its specific licence terms and conditions. Swiftnet has submitted its comments on the draft licence terms and conditions to ICASA that ICASA sent to Swiftnet during October Swiftnet, assisted by Telkom as its sole shareholder, has had a further meeting with ICASA on February 27, It was decided that the draft amended licence that ICASA sent to Swiftnet during October 2007 would not form the basis of the conversion process, but instead the original licence issued to Swiftnet in August 1995 would be used as the basis for licence conversion. The transaction is still subject to ICASA approval. With regard to shareholder issues, ICASA indicated that there is currently no agreement within the industry as to acceptable BEE shareholding percentages for all licensees. ICASA indicated that the shareholding issue for the Swiftnet licence would need to be in line with BEE values applicable to other similar licensees. Telkom Media (Proprietary) Limited On August 31, 2006 Telkom created a new subsidiary, Telkom Media (Proprietary) Limited with a Black Economic Empowerement ( BEE ) shareholding. ICASA awarded Telkom Media a commercial satelite and cable subscription broadcast license on September 12, The BEE shareholders are Videovision Entertainment, MSG Afrika Media and WDB Investment Holdings (Proprietary) Limited. As at March 31, 2008 Telkom had a 75% shareholding in Telkom Media, however, in a recent clarification and refinement of its strategy the board has taken the decision to substantially reduce its investment in Telkom Media (Proprietary) Limited and will be investigating all opportunities to do this in the best interest of Telkom shareholders and all other stakeholders. Vodacom s BBBEE equity deal Vodacom is in the process of finalising a R7.5 billion BBBEE (Broad-Based Black Economic Empowerment) equity deal whereby strategic business partners, employees and the black public will have an opportunity to share in the success of Vodacom South Africa going forward. Vodacom announced that transaction agreements were signed on June 20, Telkom is supportive of this transaction but is not in a position to comment on the impact of the proposed transaction on Telkom as the details relating to the transaction are expected to be announced by Vodacom in the third quarter of this calender year. Global Telematics SA (Proprietary) Limited On October 26, 2007 Vodacom Service Provider Company (Proprietary) Limited ( VSPC ), entered into an agreement with Global Telematics SA (Proprietary) Limited ( Global Telematics ). In terms of the agreement Glocell Service Provider Company (Proprietary) Limited ( GSPC ), will cede, transfer and assign its agreements together with all of its obligations and its rights attaching to its customers connected to the Vodacom Network to Global Telematics. GSPC connects all voice contract customers and sells pre-paid packs on behalf of Global Telematics. VSCP will acquire the consolidated customers base from Global Telematics which will consist of active prepaid customers, active contract customers and active telemetry customers, subject to certain suspensive conditions. Once these suspensive conditions are met the transactions would be effective. 280

175 Notes to the consolidated annual financial statements (continued) 45. Subsequent events Dividends The Telkom Board declared an annual dividend of R3,437 million or 660 cents per share on June 6, 2008 payable on July 7, 2008 for shareholders registered on July 4, 2008 which will fully utilise the deferred tax asset on STC credits and result in an additional STC charge of R161 million. Mobile strategy and unlocking shareholder value Telkom informed the shareholders that on Friday, May 30, 2008, Telkom received a non-binding proposal from a wholly-owned subsidiary of Vodafone Group Plc ( Vodafone ) to acquire a portion of Telkom s stake in Vodacom Group (Proprietary) Limited ( Vodacom ) subject to, inter alia, the Company unbundling its remaining stake in Vodacom to Telkom shareholders. Separately, on Friday, May 30, 2008 Telkom received a letter from a consortium comprising Mvelaphanda Holdings (Proprietary) Limited, affiliated funds of Och-Ziff Capital Management Group and other strategic funders ( the Consortium ), which states that the Consortium is considering making an offer for the entire issued share capital of Telkom. The letter makes it clear that the offer will only be made if a number of pre-conditions are met including, inter alia, confirmation by the Telkom Board that it will unbundle Telkom s entire 50% stake in Vodacom as part of the offer. The discussions with Vodafone are independent from the approach from the Consortium. The Board of Telkom, in accordance with its fiduciary duties, will evaluate all bona fide offers with a view to maximising shareholder value. No transaction will be entered into without requisite shareholder approvals. Telkom will advise shareholders of further developments in this regard in due course. VM, S.A.R.L. trading as Vodacom Mozambique Effective May 12, 2008 Vodacom International Limited sold 5% of its 90% owned equity investment in Vodacom Mozambique, leaving Vodacom International Limited with an 85% equity investment in Vodacom Mozambique. Certain suspensive conditions are to be met before the transaction will be effective. Capability Management Telkom will seek to manage costs by realigning its structure, employees and resources to better match its transforming information, communications and technology business and to improve customer service. The transformation of the communications industry and increasing market and competitive pressure has put communications companies such as Telkom under increasing revenue and expense constraints while being required to improve customer service. As a result a capability management initiative has been launched which is designed to ensure that the capabilities needed to succeed in a converged communications market are established through the optimal utilisation of external as well as internal capabilities, extracting effiencencies, where possible, through scale of a rapidly maturing retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market. The capability management initiative includes the internal consolidation of certain functional areas and the selection of strategic long-term partners with proven performance for other functional areas. The areas which are expected to be impacted are the call centers, operations, ancillary services, network service providers, network field operations, network core operations, information technology operations and retail outlets. Telkom Management Services On July 2, 2008, Telkom received confirmation from Cipro for the approval and reservation of a newly set-up company. The approved and reserved name is Telkom Management Services. Union action Telkom has received a notice from CWU advising Telkom of its intention to embark on some unspecified industrial action. Other matters The directors are not aware of any other matters or circumstances since the consolidated annual financial statements for the financial year ended March 31, 2008 and the date of this report, or otherwise dealt with in the consolidated annual financial statements, which significantly affects the financial position of the Group and the results of it operations. Telkom Annual Report

176 282

177 Company income statement 284 Company balance sheet 285 Company statement of changes in equity 286 Company cash flow statement 287 Notes to the company annual financial statements 288 Company annual financial statements

178 Company income statement Notes Rm Rm Rm Total revenue ,772 35,818 36,641 Operating revenue ,829 32,340 32,571 Other income Operating expenses 22,423 24,089 24,953 Employee expenses 5.1 6,310 7,077 7,386 Payments to other operators 5.2 6,140 6,461 6,902 Selling, general and administrative expenses 5.3 2,832 3,970 3,904 Service fees 5.4 2,022 2,236 2,410 Operating leases Depreciation, amortisation, impairment and write-offs 5.6 4,364 3,583 3,732 Operating profit 9,940 8,906 8,116 Investment income 6 2,733 3,202 3,739 Finance charges and fair value movements 7 1,320 1,027 1,289 Interest 1,222 1,142 1,499 Foreign exchange and fair value movement 98 (115) (210) Profit before taxation 11,353 11,081 10,566 Taxation 8 2,838 2,690 2,599 Profit for the year 8,515 8,391 7,

179 Company balance sheet at March 31, 2008 Assets Non-current assets 35,867 37,533 43,360 Property, plant and equipment 9 30,488 32,614 35,273 Intangible assets 10 2,867 3,502 3,806 Investments 11 2, ,883 Finance lease receivables Deferred taxation Deferred expenses Current assets 9,658 7,754 8,722 Short-term investments Inventories Income tax receivable Current portion of finance lease receivables Trade and other receivables 16 5,628 5,920 6,859 Other financial assets Cash and cash equivalents 18 3, Total assets 45,525 45,287 52,082 Equity and liabilities Notes Rm Rm Rm Capital and reserves 23,690 25,714 26,693 Share capital and premium 19 6,791 5,329 5,208 Treasury share reserve 20 (1,786) (1,778) (1,642) Share-based compensation reserve Retained earnings 18,534 21,906 22,484 Non-current liabilities 11,413 6,580 11,181 Interest-bearing debt 22 7,245 3,308 7,336 Provisions 23 2,631 1,203 1,445 Deferred revenue Deferred taxation ,330 1,530 Current liabilities 10,422 12,993 14,208 Trade and other payables 26 4,040 4,333 4,923 Shareholders for dividend Current portion of interest-bearing debt 22 2,643 5,775 6,026 Current portion of provisions 23 1,149 1,706 1,640 Current portion of deferred revenue 25 1,216 1,107 1,424 Income tax payable 30 1,164 7 Other financial liabilities Telkom Annual Report Total liabilities 21,835 19,573 25,389 Total equity and liabilities 45,525 45,287 52,082

180 Company statement of changes in equity Treasury Share-based Share Share share compensation Retained capital premium reserve reserve earnings Total Rm Rm Rm Rm Rm Rm Balance at April 1, ,570 2,723 (1,789) 68 15,033 21,605 Total income and expense Profit for the year 8,515 8,515 Dividend declared (refer to note 31) (5,014) (5,014) Increase in share-based compensation reserve (refer to note 21) Shares vested and re-issued (refer to note 21) 3 (3) Shares bought back and cancelled (refer to note 19) (121) (1,381) (1,502) Balance at March 31, ,449 1,342 (1,786) ,534 23,690 Total income and expense Profit for the year 8,391 8,391 Dividend declared (refer to note 31) (4,885) (4,885) Payment made for treasury shares (27) (27) Increase in share-based compensation reserve (refer to note 21) Shares vested and re-issued (refer to note 21) 35 (35) Shares bought back and cancelled (refer to note 19) (120) (1,342) (134) (1,596) Balance at March 31, ,329 (1,778) ,906 25,714 Total income and expense Profit for the year 7,967 7,967 Dividend declared (refer to note 31) (5,863) (5,863) Increase in share-based compensation reserve (refer to note 21) Shares vested and re-issued (refer to note 21) 136 (136) Shares bought back and cancelled (refer to note 19) (121) (1,526) (1,647) Balance at March 31, ,208 (1,642) ,484 26,

181 Company cash flow statement Notes Rm Rm Rm Cash flows from operating activities 6,783 6,349 7,722 Cash receipts from customers 31,683 32,109 32,375 Cash paid to suppliers and employees (18,329) (19,483) (20,163) Cash generated from operations 27 13,354 12,626 12,212 Interest received Dividends received 28 1,901 2,950 3,536 Finance charges paid 29 (1,032) (886) (842) Taxation paid 30 (2,892) (3,852) (1,716) Cash generated from operations before dividend paid 11,800 11,223 13,580 Dividend paid 31 (5,017) (4,874) (5,858) Cash flows from investing activities (4,494) (6,628) (9,544) Proceeds on disposal of property, plant and equipment and intangible assets Additions to property, plant and equipment and intangible assets (4,821) (6,598) (6,763) Acquisition of subsidiary/loans to subsidiaries (150) (2,945) Loans repaid by subsidiaries Cash flows from financing activities (254) (2,777) 2,088 Loans raised 4,121 5,624 23,878 Loans repaid (7,372) (6,843) (20,204) Shares bought back and cancelled (1,502) (1,596) (1,647) Decrease in net financial assets 4, Net increase/(decrease) in cash and cash equivalents 2,035 (3,056) 266 Net cash and cash equivalents at beginning of the year 1,197 3, Net cash and cash equivalents at end of the year 18 3, Telkom Annual Report

182 Notes to the annual financial statements Corporate information Telkom SA Limited ( the Company ) is a company incorporated and domiciled in the Republic of South Africa ( South Africa ) whose shares are publicly traded. The Company s main objective and main business is to supply telecommunication, broadcasting, multimedia, technology, information and other related information technology services to the general public. The principal activities of the Company s services and products include: fixed-line subscription and connection services to postpaid, prepaid and private payphone customers using PSTN lines, including ISDN lines, and the sale of subscription based valueadded voice services and customer premises equipment rental and sales; fixed-line traffic services to postpaid, prepaid and payphone customers, including local, long distance, fixed-to-mobile, international outgoing and international voice-over-internet protocol traffic services; interconnection services, including terminating and transiting traffic from South African mobile operators, as well as from international operators and transiting traffic from mobile to international destinations; fixed-line data services, including domestic and international data transmission services, such as point-to-point leased lines, ADSL services, packet-based services, managed data networking services and internet access and related information technology services; and e-commerce, including internet access service provider, application service provider, hosting, data storage, and security services. These separate annual financial statements are prepared in compliance with the South African Companies Act, In addition, the Group presents consolidated financial statements which include all subsidiaries, special purpose entities and joint ventures, which are included in these financial statements as investments. 2. Significant accounting policies Basis of preparation The financial statements comply with the International Financial Reporting Standards ( IFRS ) of the International Accounting Standards Board ( IASB ) and the Companies Act of South Africa, The financial statements are prepared on the historical cost basis, with the exception of certain financial instruments and share-based payments which are measured at grant date fair value. Details of the Company s significant accounting policies are set out below, and are consistent with those applied in the previous financial year except for the following: adoption of the amendment to IAS1; and adoption of IFRS7, IFRIC8, IFRIC9, IFRIC10 and IFRIC11. The principal effects of these changes are discussed below. Adoption of amendments to standards and new interpretations The following revised standards and interpretations have been adopted during the year under review: Amendment to IAS1 Presentation of Financial Statements This amendment is effective for annual periods beginning on or after January 1, As a result of the pronouncement of IFRS7 Financial Instruments: Disclosures, IAS1 has been amended to require the disclosure of the entity s objective, policies and processes for managing capital, quantitative data about what the entity regards as capital, whether the entity has complied with any capital requirements and if it has not complied, the consequences of such non-compliance. The impact of this amendment has been disclosed under note 12. IFRS7 Financial Instruments: Disclosures This standard is effective for annual periods beginning on or after January 1, IFRS7 supersedes disclosures in IAS32. All financial instruments disclosures will now be provided in terms of IFRS7. One of the main disclosure requirements added by IFRS7 is that an entity must group its financial instruments into classes of similar instruments, and when disclosures are required, make disclosures by class. IFRS7 also requires information about the significance of financial instruments and information about the nature and extent of risks arising from financial instruments. The impact of this standard is to expand on certain disclosures relating to financial instruments and requires certain additional disclosures (refer to note 12). IFRIC8 Scope of IFRS2 The interpretation is effective for annual periods beginning on or after May 1, The interpretation clarifies that IFRS2 applies to transactions in which an entity receives goods or services as consideration for equity instruments of the entity. This includes transactions in which the entity cannot identify specifically some or all of the goods or services received. The impact of the interpretation on the annual financial statements is not material since the Company has not transacted with other parties using equity as a purchase consideration for the transaction, other than those paid to employees in share-based payment transactions. IFRIC9 Reassessment of Embedded Derivatives The interpretation is effective for annual periods beginning on or after June 1, The interpretation clarifies that an entity should assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. It further clarifies that reassessment is only allowed when there is a change in the terms of the contract which significantly modifies the cash flows that would otherwise be required under the contract. The interpretation does not have an impact since the Company does not have embedded derivatives.

183 Notes to the annual financial statements (continued) 2. Significant accounting policies (continued) Adoption of amendments to standards and new interpretations (continued) IFRIC10 Interim Financial Reporting and Impairment The interpretation is effective for annual periods beginning on or after November 1, The interpretation clarifies that an entity should not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument classified as available for sale or financial asset carried at cost. The interpretation has had no impact on the annual financial statements. IFRIC11, IFRS2 Group and Treasury Share Transactions The interpretation is effective for annual periods beginning on or after March 1, The interpretation clarifies that regardless of whether the entity chooses or is required to buy equity instruments from another party to satisfy its obligations to its employees under the share-based payment arrangement by delivery of its own shares, the transaction should be accounted for as equity settled. This interpretation also applies regardless of whether the employee s rights to the equity instruments were granted by the entity itself or by its shareholders or was settled by the entity itself or its shareholders. Share-based payments involving the Group s own equity instruments in which the Group chooses or is required to buy its own equity instruments to settle the share-based payment obligation are currently accounted for as equity-settled share-based payment transactions under IFRS2. The interpretation has had no impact on the Company annual financial statements. Accounting pronouncements not yet adopted The Company has not early adopted the following standards, interpretations and amendments that have been issued and are not yet effective: IFRS2 Vesting Conditions and Cancellations This amendment is effective for annual periods beginning on or after January 1, The amendment to IFRS2 Share-based Payment clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement. All features of a share-based payment arrangement other than service conditions and performance conditions will be considered to be non-vesting conditions. IFRS2 (as revised) specifies that, when estimating the fair value of equity instruments granted, an entity shall take into account all non-vesting conditions (i.e. all conditions other than service and performance conditions) and vesting conditions that are market conditions (i.e. conditions that are related to the market price of the entity s equity instruments for example, attaining a specified share price). The impact of this amendment is currently being evaluated. IFRS3 Business Combinations-comprehensive revision on applying the acquisition method The revised standard is effective for annual periods beginning on or after July 1, The revised IFRS3 requires the consideration for the acquisition, including the fair value of any contingent consideration payable to be measured at fair value at the acquisition date. The revised standard only permits subsequent changes to the measurement of contingent consideration as a result of additional information about facts and circumstances that existed at the acquisition date. All other changes (e.g. changes resulting from events after the acquisition date such as the acquiree meeting an earnings target, reaching a specified share price, or meeting a milestone on a research and development project) are recognised in profit or loss. Acquisition-related costs are now required to be expensed. Business combinations involving only mutual entities and business combinations achieved by contract alone have also been included in IFRS3. Consequential amendments arising from revisions to IFRS3 on IAS27 Consolidated and Separate Financial Statements The revised IAS27 specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. No gain or loss is recognised on such transactions and goodwill is not re-measured. Any difference between the change in the Non Controlling Interest and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent. Consequential amendments arising from revisions to IFRS3 on IAS28 Investments in Associates; IAS31 Interests in Joint Ventures Amendments to IAS28 and IAS31 extend the treatment required for loss of control to these standards. For partial disposals of associates and joint ventures, the amended standards stipulate that if an investor loses significant influence over an associate, it derecognises that associate and recognises in profit or loss the difference between the sum of the proceeds received and any retained interest, and the carrying amount of the investment in the associate at the date significant influence is lost. A similar treatment is required when an investor loses joint control over a jointly controlled entity. The possible impact of this standard is currently being evaluated. IFRS8 Operating Segments This standard is effective for annual periods beginning on or after January 1, The significant change to the standard is that it requires segments to be disclosed based on the information that management uses to make decisions about operating matters. IFRS8 sets out the requirements for disclosure of information about an entity s operating segments and also about the entity s products and services, the geographical areas in which it operates, and its major customers. IFRS8 further requires the entity to disclose factors used to identify the entity s operating segments and type of products and services from which each operating segment derives its revenues. The impact of this standard is currently being evaluated. Telkom Annual Report

184 Notes to the annual financial statements (continued) Significant accounting policies (continued) Accounting pronouncements not yet adopted (continued) IAS1 Presentation of Financial Statement (revised) The revised standard is effective for annual periods beginning on or after January 1, The changes made to IAS1 require information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. This will enable users to analyse changes in a company s equity resulting from transactions with owners in their capacity as owners (such as dividends and share repurchases) separately from non-owner changes (such as transactions with third parties). The revised standard gives preparers of financial statements the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements. The revisions include changes in the titles of some of the financial statements to reflect their function more clearly. The new titles will be used in accounting standards, but are not mandatory for use in financial statements. The impact of this standard will be that the presentation of the financial statements will change. IAS23 Borrowing Costs The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised. The revised Standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, The Company does not expect the adoption of the standard to have a material impact since the Company has always applied the allowed alternative of capitalising borrowing costs under the current standard. Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, puttable financial instruments The amendment is effective for annual periods beginning on or after January 1, In January 2008, the IASB amended IAS32 and IAS1 Presentation of Financial Statements with respect to the balance sheet classification of puttable financial instruments and obligations arising only on liquidation. As a result of the amendments, some financial instruments that currently meet the definition of a financial liability will be classified as equity because they represent the residual interest in the net assets of the entity. The impact of this standard is currently being evaluated. IFRIC12 Service Concession Arrangements The interpretation is effective for annual periods beginning on or after January 1, The interpretation clarifies that contractual service arrangements do not convey the right to control the use of the public service infrastructure to the operator, instead the operator acts as a service provider. The infrastructure under these arrangements shall therefore not be recognised as the property, plant and equipment of the operator. The operator shall recognise and measure revenue in accordance with IAS11 and IAS18 for the services it performs. The operator should recognise the asset as an intangible asset for the right (or licence) it receives to charge the users of the public service or as a financial asset when it has the right to receive cash from the grantor for construction services. The interpretation provides guidance on the recognition and measurement of the various aspects of service concession arrangements from an operator s perspective. The impact of this interpretation is currently being evaluated. IFRIC13 Customer Loyalty Programmes The interpretation is effective for annual periods beginning on or after July 1, The interpretation addresses accounting by entities that grant loyalty award credits (such as points or travel miles) to customers who buy other goods or services. It specifically requires these entities to recognise the obligation to provide free or discounted goods or services ( awards ) to customers who redeem award credits. The interpretation requires companies to estimate the value of the points to the customer and defer this amount of revenue and recognise a liability until they have fulfilled their obligations to supply awards. In effect, the award is accounted for as a separate component of the sale transaction. The possible impact of this interpretation is not expected to be significant as the Company does not have customer loyalty programmes. IFRIC14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The interpretation is effective for annual periods beginning on or after January 1, The interpretation addresses the interaction between a minimum funding requirement and the limit placed by paragraph 58 of IAS19 on the measurement of the defined benefit asset. When determining the limit on a defined benefit asset in accordance with IAS19.58, IFRIC14 requires an entity to measure any economic benefits available to them in the form of refunds or reductions in future contributions at the maximum amount that is consistent with the terms and conditions of the plan and any statutory requirements in the jurisdiction of the plan. The interpretation states that the employer only needs to have an unconditional right to use the surplus at some point during the life of the plan or on its wind up in order for a surplus to be recognised. The Company is currently evaluating the potential impact that the interpretation will have on the financial position or results of operations. Significant accounting judgements and estimates The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Although these estimates are based on management s best knowledge of current events and actions that the Company may undertake in the future, actual results may ultimately differ from those estimates. The presentation of the results of operations, financial position and cash flows in the financial statements of the Company is dependent upon and sensitive to the accounting policies, assumptions and estimates that are used as a basis for the preparation of these financial statements. Management has made certain judgements in the process of applying the Company s accounting policies. These, together with the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, are as follows:

185 Notes to the annual financial statements (continued) 2. Significant accounting policies (continued) Significant accounting judgements and estimates (continued) Property, plant and equipment and intangible assets The useful lives of assets are based on management s estimation. Management considers the impact of changes in technology, customer service requirements, availability of capital funding and required return on assets and equity to determine the optimum useful life expectation for each of the individual categories of property, plant and equipment and intangible assets. Due to the rapid technological advancement in the telecommunications industry as well as the Company s plan to migrate to a next generation network over the next few years, the estimation of useful lives could differ significantly on an annual basis due to unexpected changes in the roll-out strategy. The impact of the change in the expected useful life of property, plant and equipment is described more fully in note 5.6. The estimation of residual values of assets is also based on management s judgement whether the assets will be sold or used to the end of their useful lives and what their condition will be like at that time. For intangible assets that incorporate both a tangible and intangible portion, management uses judgement to assess which element is more significant to determine whether it should be treated as property, plant and equipment or intangible assets. Asset retirement obligations Management judgement is exercised when determining whether an asset retirement obligation exists, and in determining the present value of expected future cash flows and discount rate when the obligation to dismantle or restore the site arises, as well as the estimated useful life of the related asset. Impairment of property, plant and equipment and intangible assets Management is required to make judgements concerning the cause, timing and amount of impairment. In the identification of impairment indicators, management considers the impact of changes in current competitive conditions, cost of capital, availability of funding, technological obsolescence, discontinuance of services and other circumstances that could indicate that an impairment exists. The Company applies the impairment assessment to its separate cash-generating units. This requires management to make significant judgements concerning the existence of impairment indicators, identification of separate cashgenerating units, remaining useful lives of assets and estimates of projected cash flows and fair value less costs to sell. Management judgement is also required when assessing whether a previously recognised impairment loss should be reversed. Where impairment indicators exist, the determination of the recoverable amount of a cash-generating unit requires management to make assumptions to determine the fair value less costs to sell and value in use. Key assumptions on which management has based its determination of fair value less costs to sell include the existence of binding sale agreements, and for the determination of value in use include projected revenues, gross margins, average revenue per asset component, capital expenditure, expected customer bases and market share. The judgements, assumptions and methodologies used can have a material impact on the fair value and ultimately the amount of any impairment. Impairment of other financial assets At each balance sheet date management assesses whether there are indicators of impairment of financial assets, including equity investments. If such evidence exists, the estimated present value of the future cash flows of that asset is determined. Management judgement is required when determining the expected future cash flows. To determine whether the decline in fair value is prolonged, reliance is placed on an assessment by management regarding the future prospects of the investee. In measuring impairments, quoted market prices are used, if available, or projected business plan information from the investee is used for those financial assets not carried at fair value. Impairment of receivables An impairment is recognised on trade receivables that are assessed to be impaired. The impairment is based on an assessment of the extent to which customers have defaulted on payments already due and an assessment on their ability to make payments based on their credit worthiness and historical write-offs experience. Should the assumptions regarding the financial condition of the customer change, actual write-offs could differ significantly from the impaired amount. Leases The determination of whether an arrangement is, or contains a lease is based on whether, at the date of inception, the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Deferred taxation asset Management judgement is exercised when determining the probability of future taxable profits which will determine whether deferred tax assets should be recognised or derecognised. The realisation of deferred tax assets will depend on whether it is possible to generate sufficient taxable income, taking into account any legal restrictions on the length and nature of the taxation asset. When deciding whether to recognise unutilised taxation credits, management needs to determine the extent that future payments are likely to be available for set-off. In the event that the assessment of future payments and future utilisation changes, the change in the recognised deferred tax asset must be recognised in profit or loss. Telkom Annual Report

186 Notes to the annual financial statements (continued) Significant accounting policies (continued) Significant accounting judgements and estimates (continued) Taxation The Company has historically filed, and continues to file, all required income tax returns. Management believes that the principles applied in determining the Company s tax obligations are consistent with the principles and interpretations of South Africa s tax laws. Management has made a judgement that all outstanding tax credits relating to Secondary Tax on Companies ( STC ) will be available for utilisation before the tax regime change is effective, despite the change of STC to withholding tax. The tax rules and regulations in South Africa are highly complex and subject to interpretation. Additionally, for the foreseeable future, management expects South African tax laws to further develop through changes in South Africa s existing tax structure as well as clarification of the existing tax laws through published interpretations and the resolution of actual tax cases. The Company is regularly subject to evaluation, by the South African tax authorities, of its historic income tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain tax rules to the Company s business. These disputes may not necessarily be resolved in a manner that is favourable for the Company. Additionally the resolution of the disputes could result in an obligation for the Company that exceeds management s estimate. Deferred taxation rate Management makes judgements on the tax rate applicable based on the Company s expectations at balance sheet date on how the asset is expected to be recovered or the liability is expected to be settled. Employee benefits The Company provides defined benefit plans for certain postemployment benefits. The Company s net obligation in respect of defined benefits is calculated separately for each plan by estimating the amount of future benefits earned in return for services rendered. The obligation and assets related to each of the post-retirement benefits are determined through an actuarial valuation. The assumptions determined by management make use of information obtained from the Company s employment agreements with staff and pensioners, market related returns on similar investments, market related discount rates and other available information. The assumptions concerning the expected return on assets and expected change in liabilities are determined on a uniform basis, considering long-term historical returns and future estimates of returns and medical inflation expectations. In the event that further changes in assumptions are required, the future amounts of post-retirement benefits may be affected materially. The discount rate reflects the average timing of the estimated defined benefit payments. The discount rate is based on long-term South African government bonds with the longest maturity period as reported by the Bond Exchange of South Africa. The discount rate is expected to follow the trend of inflation. The overall expected rate of return on assets is determined based on the market prices prevailing at that date, applicable to the period over which the obligation is to be settled. The Company provides equity compensation in the form of the Telkom Conditional Share Plan to its employees. The related expense and reserve are determined through an actuarial valuation. The assumptions include employee turnover percentages and whether specified performance criteria will be met. Changes to these assumptions could affect the amount of expense ultimately recognised in the financial statements. An actuarial valuation relies heavily on the actual plan experience assumptions as disclosed in note 24. Provisions and contingent liabilities Management judgement is required when recognising and measuring provisions and when measuring contingent liabilities as set out in notes 23 and 34 respectively. The probability that an outflow of economic resources will be required to settle the obligation must be assessed and a reliable estimate must be made of the amount of the obligation. Provisions are discounted where the effect of discounting is material based on managements judgement. The discount rate used is the rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability, all of which requires management judgement. The Company is required to recognise provisions for claims arising from litigation when the occurrence of the claim is probable and the amount of the loss can be reasonably estimated. Liabilities provided for legal matters require judgements regarding projected outcomes and ranges of losses based on historical experience and recommendations of legal counsel. Litigation is however unpredictable and actual costs incurred could differ materially from those estimated at the balance sheet date. Held-to-maturity financial assets Management has reviewed the Company s held-to-maturity financial assets in the light of its capital management and liquidity requirements and have confirmed the Company s positive intention and ability to hold those assets to maturity. Revenue recognition To reflect the substance of each transaction, revenue recognition criteria are applied to each separately identifiable component of a transaction. In order to account for multiple-element revenue arrangements in developing its accounting policies, the Company considered the guidance contained in the United States Financial Accounting Standards Board ( FASB ) Emerging Issues Task Force No Revenue Arrangements with Multiple Deliverables. Judgement is required to separate those revenue arrangements that contain the delivery of bundled products or services into individual units of accounting, each with its own earnings process, when the delivered item has stand-alone value and the undelivered item has fair value. Further judgement is required to determine the relative fair values of each separate unit of accounting to be allocated to the total arrangement consideration. Changes in the relative fair values could affect the allocation of arrangement consideration between the various revenue streams. Judgement is also required to determine the expected customer relationship period. Any changes in these assessments may have a significant impact on revenue and deferred revenue.

187 Notes to the annual financial statements (continued) 2. Significant accounting policies (continued) Summary of significant accounting policies Operating revenue The Company provides fixed-line and data communication services and communication-related products. The Company provides such services to business, residential and payphone customers. Revenue represents the fair value of fixed or determinable consideration that has been received or is receivable. Revenue for services is measured at amounts invoiced to customers and excludes Value Added Tax. Revenue is recognised when there is evidence of an arrangement, collectability is probable, and the delivery of the product or service has occurred. In certain circumstances, revenue is split into separately identifiable components and recognised when the related components are delivered in order to reflect the substance of the transaction. The value of components is determined using verifiable objective evidence. The Company does not provide customers with the right to a refund. Dealer incentives The Company provides incentives to its retail payphone card distributors as trade discounts. Incentives are based on sales volume and value. Revenue for retail payphone cards is recorded as traffic revenue, net of these discounts as the cards are used. Subscriptions, connections and other usage The Company provides telephone and data communication services under postpaid and prepaid payment arrangements. Revenue includes fees for installation and activation, which are deferred and recognised over the expected customer relationship period. Costs incurred on first time installations that form an integral part of the network are capitalised and depreciated over the expected average customer relationship period. All other installation and activation costs are expensed as incurred. Postpaid and prepaid service arrangements include subscription fees, typically monthly fees, which are recognised over the subscription period. Revenue related to sale of communication equipment, products and value-added services is recognised upon delivery and acceptance of the product or service by the customer. Traffic (Domestic, Fixed-to-mobile and International) Prepaid Prepaid traffic service revenue collected in advance is deferred and recognised based on actual usage or upon expiration of the usage period, whichever comes first. The terms and conditions of certain prepaid products allow the carry over of unused minutes. Revenue related to the carry over of unused minutes is deferred until usage or expiration. Payphones Payphone service coin revenue is recognised when the service is provided. Payphone service card revenue collected in advance is deferred and recognised based on actual usage or upon expiration of the usage period, whichever comes first. Postpaid Revenue related to local, long distance, network-to-network, roaming and international call connection services is recognised when the call is placed or the connection provided. Interconnection Interconnection revenue for call termination, call transit and network usage is recognised as the traffic flow occurs. Data The Company provides data communication services under postpaid and prepaid payment arrangements. Revenue includes fees for installation and activation, which are deferred over the expected average customer relationship period. Costs incurred on first time installations that form an integral part of the network are capitalised and depreciated over the life of the expected average customer relationship period. All other installation and activation costs are expensed as incurred. Postpaid and prepaid service arrangements include subscription fees, typically monthly fees, which are recognised over the subscription period. Sundry revenue Sundry revenue is recognised when the economic benefit flows to the Company and the earnings process is complete. Interest on debtors accounts Interest is raised on overdue accounts by using the effective interest rate method and recognised in the income statement. Marketing costs are recognised as an expense as incurred. Investment income Dividends from investments are recognised on the date that the Company is entitled to the dividend. Interest is recognised on a time proportionate basis taking into account the principal amount outstanding and the effective interest rate. Taxation Current taxation The charge for current taxation is based on the results for the year and is adjusted for non-taxable income and non-deductible expenditure. Current taxation is measured at the amount expected to be paid to the taxation authorities, using taxation rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred taxation Deferred taxation is accounted for using the balance sheet liability method on all temporary differences at the balance sheet date between tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax is not provided on the initial recognition of goodwill or initial recognition of assets or liabilities which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss. Telkom Annual Report

188 Notes to the annual financial statements (continued) Significant accounting policies (continued) Taxation (continued) Deferred taxation (continued) A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses, unused tax credits and deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that the related tax benefit will be realised, except in respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures. Deferred income tax assets are recognised only to the extent that it is probable that temporary differences will reverse in the foreseeable future, and taxable profit will be available against which the temporary differences can be utilised. Deferred tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Secondary taxation on companies Secondary taxation on companies ( STC ) is provided for at a rate of 10% (12.5% before October 1, 2007) on the amount by which dividends declared by the Company exceeds dividends received. Deferred tax on unutilised STC credits is recognised to the extent that STC payable on future dividend payments is likely to be available for set-off. Property, plant and equipment At initial recognition acquired property, plant and equipment are recognised at their purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. The recognised cost includes any directly attributable costs for preparing the asset for its intended use. The cost of an item of property, plant and equipment is recognised as an asset if it is probable that the future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. Property, plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Each component of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Depreciation is charged from the date the asset is available for use on a straight-line basis over the estimated useful life and ceases at the earlier of the date that the asset is classified as held for sale or the date the asset is derecognised. Idle assets continue to attract depreciation. The estimated useful life of individual assets and the depreciation method thereof are reviewed on an annual basis at balance sheet date. The depreciable amount is determined after taking into account the residual value of the asset. The residual value is the estimated amount that the Company would currently obtain from the disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual values of assets are reviewed on an annual basis at balance sheet date. Assets under construction represent freehold buildings, operating software, network and support equipment and includes all direct expenditure as well as related borrowing costs capitalised, but excludes the costs of abnormal amounts of waste material, labour, or other resources incurred in the production of selfconstructed assets. Freehold land is stated at cost and is not depreciated. Amounts paid by the Company on improvements to assets which are held in terms of operating lease agreements are depreciated on a straight-line basis over the shorter of the remaining useful life of the applicable asset or the remainder of the lease period. Where it is reasonably certain that the lease agreement will be renewed, the lease period equals the period of the initial agreement plus the renewal periods. The estimated useful lives assigned to groups of property, plant and equipment are: Years Freehold buildings 15 to 40 Leasehold buildings and improvements 7 to 25 Network equipment Cables 20 to 40 Switching equipment 5 to 18 Transmission equipment 5 to 18 Other 2 to 20 Support equipment 5 to 13 Furniture and office equipment 11 to 15 Data processing equipment and software 5 to 10 Other 2 to 15 An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.

189 Notes to the annual financial statements (continued) 2. Significant accounting policies (continued) Intangible assets At initial recognition acquired intangible assets are recognised at their purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. The recognised cost includes any directly attributable costs for preparing the asset for its intended use. Internally generated intangible assets are recognised at cost comprising all directly attributable costs necessary to create and prepare the asset to be capable of operating in the manner intended by management. Licenses, software, trademarks, copyrights and other intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation commences when the intangible assets are available for their intended use and is recognised on a straight-line basis over the assets expected useful lives. Amortisation ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognised. The residual value of intangible assets is the estimated amount that the Company would currently obtain from the disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Due to the nature of the asset the residual value is assumed to be zero unless there is a commitment by a third party to purchase the asset at the end of its useful life or when there is an active market that is likely to exist at the end of the asset s useful life, which can be used to estimate the residual values. The residual values of intangible assets and their useful lives are reviewed on an annual basis at balance sheet date. Intangible assets with indefinite useful lives and intangible assets not yet available for use, are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Assets under construction represent application and other non integral software and includes all direct expenditure as well as related borrowing costs capitalised, but exclude the costs of abnormal amounts of waste material, labour, or other resources incurred in the production of self-constructed assets. Intangible assets are derecognised when they have been disposed of or when the asset is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of assets are recognised in the income statement in the year in which they arise. The expected useful lives assigned to intangible assets are: Years Software 5 to 10 Trademarks and copyrights 4 to 5 Asset retirement obligations Asset retirement obligations related to property, plant and equipment and intangible assets are recognised at the present value of expected future cash flows when the obligation to dismantle or restore the site arises. The increase in the related asset s carrying value is depreciated over its estimated useful life. The unwinding of the discount is included in finance charges and fair value movements. Changes in the measurement of an existing liability that result from changes in the estimated timing or amount of the outflow of resources required to settle the liability, or a change in the discount rate, are accounted for as increases or decreases to the original cost of the recognised assets. If the amount deducted exceeds the carrying amount of the asset, the excess is recognised immediately in profit or loss. Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a complete sale within one year from the date of classification. Assets are no longer depreciated when they are classified into this category. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets previous carrying amount and fair value less costs to sell. Impairment of property, plant and equipment and intangible assets The Company regularly reviews its assets, other than financial instruments, and cash-generating units for any indication of impairment. When indicators, including changes in technology, market, economic, legal and operating environments occur and could result in changes of the asset s or cash-generating unit s estimated recoverable amount, an impairment test is performed. The recoverable amount of assets or cash-generating units is measured using the higher of the fair value less costs to sell and its value in use, which is the present value of projected cash flows covering the remaining useful lives of the assets. Impairment losses are recognised when the asset s carrying value exceeds its estimated recoverable amount. Where applicable, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Previously recognised impairment losses, other than for goodwill, are reviewed annually for any indication that it may no longer exist or may have decreased. If any such indication exists, the recoverable amount of the asset is estimated. Such impairment losses are reversed through the income statement if the recoverable amount has increased as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depreciation or amortisation) had no impairment loss been recognised in prior years. Impairment on goodwill is not reversed. Telkom Annual Report

190 Notes to the annual financial statements (continued) Significant accounting policies (continued) Repairs and maintenance The Company expenses all costs associated with repairs and maintenance, unless it is probable that such costs would result in increased future economic benefits flowing to the Company, and the costs can be reliably measured. Borrowing costs Financing costs directly associated with the acquisition or construction of assets that require more than three months to complete and place in service are capitalised at interest rates relating to loans specifically raised for that purpose, or at the weighted average borrowing rate where the general pool of Company borrowings was utilised. Other borrowing costs are expensed as incurred. Subsidiaries and joint venture Investments in subsidiaries, special purpose entities and joint ventures are carried at cost and adjusted for any impairment losses. Inventories Installation material, maintenance and network equipment inventories are stated at the lower of cost, determined on a weighted average basis, or estimated net realisable value. Merchandise inventories are stated at the lower of cost, determined on a first-in first-out ( FIFO ) basis, or estimated net realisable value. Write-down of inventories arises when, for example, goods are damaged or when net realisable value is lower than carrying value. Financial instruments Recognition and initial measurement All financial instruments are initially recognised at fair value, plus, in the case of financial assets and liabilities not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue. Financial instruments are recognised when the Company becomes a party to their contractual arrangements. All regular way transactions are accounted for on settlement date. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Subsequent measurement Subsequent to initial recognition, the Company classifies financial assets as at fair value through profit or loss, held-to-maturity investments, loans and receivables, or available-for-sale. The measurement of each is set out below. The fair value of financial assets and liabilities that are actively traded in financial markets is determined by reference to quoted market prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques such as discounted cash flow analysis. Financial assets at fair value through profit or loss The Company classifies financial assets that are held for trading in the category financial assets at fair value through profit or loss. This category includes bills of exchange and promissory notes. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the future. Derivatives not designated as hedges are also classified as held for trading. On remeasurement to fair value the gains or losses on held for trading financial assets are recognised in net finance charges and fair value movements for the year. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the income statement within finance charges and fair value movements in the period which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Company s right to receive payment is established. Held-to-maturity assets The Company classifies non-derivative financial assets with fixed or determinable payments and fixed maturity dates as held-tomaturity when the Company has the positive intention and ability to hold to maturity. This category includes bills of exchange and promissory notes. These assets are subsequently measured at amortised cost. Amortised cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest rate method. This calculation includes all fees paid or received between parties to the contract. For investments carried at amortised cost, gains and losses are recognised in net profit or loss when the investments are sold or impaired. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest rate method. Trade receivables are subsequently measured at the original invoice amount where the effect of discounting is not material. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative assets that are designated as available-for-sale, or are not classified in any of the three preceding categories. Equity instruments are all treated as available-for-sale financial instruments. After initial recognition, available-for-sale financial assets are measured at fair value, with gains and losses being recognised as a separate component of equity, net of tax. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss, while translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised in equity.

191 Notes to the annual financial statements (continued) 2. Significant accounting policies (continued) Financial instruments (continued) Financial liabilities at fair value through profit or loss Financial liabilities are classified as at fair value through profit or loss ( FVTPL ) where the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading: if it is acquired for the purpose of settling in the near term; or if it is a derivative that is not designated and effective as a hedging instrument. Financial liabilities at a FVTPL are stated at fair value, with any resultant gains or losses recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability. Other financial liabilities Other financial liabilities are subsequently measured at amortised cost using the effective interest rate method, with interest expense recognised in finance charges and fair value movements, on an effective interest rate basis. The effective interest rate is the rate that accurately discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Financial guarantee contracts Financial guarantee contracts are subsequently measured at the higher of the amount determined in accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets or the amount initially recognised less, when appropriate, cumulative amortisation, recognised in accordance with IAS18 Revenue. Put option A contract that contains an obligation for the Company to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability and is accounted for at the present value of the redemption amount. On initial recognition its fair value is reclassified directly from equity. Subsequent changes in the liability are included in profit or loss. On expiry or exercise of the option the carrying value of the liability is reclassified directly to equity. Cash and cash equivalents Cash and cash equivalents are measured at amortised cost. This comprise cash on hand, deposits held on call and term deposits with an initial maturity of less than three months when purchased. For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents defined above, net of credit facilities utilised. Capital and money market transactions New bonds and commercial paper bills issued are subsequently measured at amortised cost using the effective interest rate method. Bonds issued where the Company is a buyer and seller of last resort are carried at fair value. The Company does not actively trade in bonds. Derecognition A financial instrument or a portion of a financial instrument will be derecognised and a gain or loss recognised when the Company s contractual rights expire, financial assets are transferred or financial liabilities are extinguished. On derecognition of a financial asset or liability, the difference between the consideration and the carrying amount on the settlement date is included in finance charges and fair value movements for the year. For available-forsale assets, the fair value adjustment relating to prior revaluations of assets is transferred from equity and recognised in finance charges and fair value movements for the year. Bonds and commercial paper bills are derecognised when the obligation specified in the contract is discharged. The difference between the carrying value of the bond and the amount paid to extinguish the obligation is included in finance charges and fair value movements for the year. Impairment of financial assets At each balance sheet date an assessment is made of whether there are any indicators of impairment of a financial asset or a group of financial assets based on observable data about one or more loss events that occurred after the initial recognition of the asset or the group of assets. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. The recoverable amount of financial assets carried at amortised cost is calculated as the present value of expected future cash flows discounted at the original effective interest rate of the asset. If, in a subsequent period, the amount of the impairment loss for financial assets decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed except for those financial assets classified as available-for-sale and carried at cost that are not reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Reversals in respect of equity instruments classified as available-for-sale are not recognised. Reversals of impairment losses on debt instruments classified as available-for-sale are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised. Telkom Annual Report

192 Notes to the annual financial statements (continued) Significant accounting policies (continued) Foreign currencies The functional and presentation currency of the Company is the South African Rand ( ZAR ). Transactions denominated in foreign currencies are measured at the rate of exchange at transaction date. Monetary items denominated in foreign currencies are remeasured at the rate of exchange at settlement date or balance sheet date whichever occurs first. Exchange differences on the settlement or translation of monetary assets and liabilities are included in finance charges and fair value movements in the period in which they arise. Treasury shares Where the company acquires, or in substance acquires, its own shares, such shares are measured at cost and disclosed as a reduction of equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company s own equity instruments. Such shares are not remeasured for changes in fair value. Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. All other leases are classified as operating leases. Where the Company enters into a service agreement as a supplier or a customer that depends on the use of a specific asset, and conveys the right to control the use of the specific asset, the arrangement is assessed to determine whether it contains a lease. Once it has been concluded that an arrangement contains a lease, it is assessed against the criteria in IAS17 to determine if the arrangement should be recognised as a finance lease or operating lease. The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification unless it is impractical to do so. Lessee Operating lease payments are recognised in the income statement on a straight-line basis over the lease term. Assets acquired in terms of finance leases are capitalised at the lower of fair value or the present value of the minimum lease payments at inception of the lease and depreciated over the lesser of the useful life of the asset or the lease term. The capital element of future obligations under the leases is included as a liability in the balance sheet. Lease finance costs are amortised in the income statement over the lease term using a constant periodic rate of interest. Where a sale and leaseback transaction results in a finance lease, any excess of sale proceeds over the carrying amount is deferred and recognised in the income statement over the term of the lease. Lessor Operating lease revenue is recognised in the income statement on a straight-line basis over the lease term. Assets held under a finance lease are recognised in the balance sheet and presented as a receivable at an amount equal to the net investment in the lease. The recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the net investment in the finance lease. Employee benefits Post-employment benefits The Company provides defined benefit and defined contribution plans for the benefit of employees. These plans are funded by the employees and the Company, taking into account recommendations of the independent actuaries. The postretirement telephone rebate liability is unfunded. Defined contribution plans The Company s funding of the defined contribution plans is charged to employee expenses in the same year as the related service is provided. Defined benefit plans The Company provides defined benefit plans for pension, retirement, post-retirement medical aid benefits and telephone rebates to qualifying employees. The Company s net obligation in respect of defined benefits is calculated separately for each plan by estimating the amount of future benefits earned in return for services rendered. The amount recognised in the balance sheet represents the present value of the defined benefit obligations, calculated by using the projected unit credit method, as adjusted for unrecognised actuarial gains and losses, unrecognised past service costs and reduced by the fair value of the related plan assets. The amount of any surplus recognised and reflected as deferred expenses is limited to unrecognised actuarial losses and past service costs plus the present value of available refunds and reductions in future contributions to the plan. To the extent that there is uncertainty as to the entitlement to the surplus (i.e. no economic benefits are available), no asset is recognised. No gain is recognised solely as a result of an actuarial loss or past service cost in the current period and no loss is recognised solely as a result of an actuarial gain or past service cost in the current period. Actuarial gains and losses are recognised as employee expenses when the cumulative unrecognised gains and losses for each individual plan exceed 10% of the greater of the present value of the Company s obligation and the fair value of plan assets at the beginning of the year. These gains or losses are amortised on a straight-line basis over ten years for all the defined benefit plans, except gains or losses related to the pensioners in the Telkom Retirement Fund or unless the standard requires faster recognition. For the Telkom Retirement Fund, the cumulative unrecognised actuarial gains and losses in excess of the 10% corridor at the beginning of the year are recognised immediately. Past service costs are recognised immediately to the extent that the benefits are vested, otherwise they are recognised on a straight-line basis over the average period the benefits become vested.

193 Notes to the annual financial statements (continued) 2. Significant accounting policies (continued) Employee benefits (continued) Leave benefits Annual leave is provided for over the period that the leave accrues and is subject to a cap of 22 days. Workforce reduction Workforce reduction expenses are payable when employment is terminated before the normal retirement age or when an employee accepts voluntary redundancy in exchange for benefits. Workforce reduction benefits are recognised when the Company is demonstrably committed and it is probable that the expenses will be incurred. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits is based on the number of employees expected to accept the offer. Share-based compensation The grants of equity instruments, made to employees in terms of the Telkom Conditional Share Plan, are classified as equity-settled share-based payment transactions. The expense relating to the services rendered by the employees, and the corresponding increase in equity, is measured at the fair value of the equity instruments at their date of grant based on the market price at grant date, adjusted for the lack of entitlement to dividends during the vesting period. This compensation cost is recognised over the vesting period, based on the best available estimate at each balance sheet date of the number of equity instruments that are expected to vest. Short-term employee benefits The cost of all short-term employee benefits is recognised during the year the employees render services, unless the Company uses the services of employees in the construction of an asset and the benefits received meet the recognition criteria of an asset, at which stage it is included as part of the related property, plant and equipment or intangible asset item. Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. Telkom Annual Report

194 Notes to the annual financial statements (continued) 3. Revenue 3.1 Total revenue 34,772 35,818 36,641 Operating revenue 31,829 32,340 32,571 Other income (excluding profit on disposal of property, plant and equipment, investments and intangible assets, refer to note 4) Investment income (refer to note 6) 2,733 3,202 3, Operating revenue 31,829 32,340 32,571 Subscriptions, connections and other usage 5,803 6,286 6,330 Traffic 17,563 16,740 15,949 Domestic (local and long distance) 8,915 7,563 6,327 Fixed-to-mobile 7,647 7,646 7,557 International (outgoing) 1, Subscription based calling plans* 543 1,079 Interconnection 1,654 1,639 1,757 Data 6,674 7,489 8,308 Sundry revenue *The company has reclassified calling plans from domestic traffic into a separate revenue line item to disclose revenue earned from subscription based calling plans. Amounts for the year ended March 31, 2006 were not restated as they were considered to be immaterial Rm Rm Rm 4. Other income Other income (included in Total revenue, refer to note 3) Interest received from trade receivables Other interest Sundry income Profit on disposal of property, plant and equipment and intangible assets Profit on disposal of investment The increase in the profit on disposal of property, plant and equipment and intangible assets is due to the increased volumes and values on the sale of Telkom properties in alignment with Telkom s strategy of disposing non-core assets. 300

195 Notes to the annual financial statements (continued) 5. Operating expenses Operating expenses comprise: Rm Rm Rm 5.1 Employee expenses 6,310 7,077 7,386 Salaries and wages 4,463 5,076 5,505 Medical aid contributions Retirement contributions Post-retirement pension and retirement fund (refer to note 24) (58) 33 5 Current service cost Interest cost Expected return on plan assets (454) (508) (713) Actuarial loss/(gain) 78 (136) (16) Settlement loss/(gain) 21 (2) Asset limitation (50) Post-retirement medical aid (refer to note 23) Current service cost Interest cost Expected return on plan asset (188) (257) Actuarial loss Settlement loss 4 Telephone rebates (refer to note 23) Current service cost Interest cost Past service cost 76 2 Actuarial loss 5 Share-based compensation expense (refer to note 21 and 24) Other benefits* 1,277 1, Employee expenses capitalised (620) (696) (786) *Other benefits include skills development, annual leave, performance incentive, service bonuses and workforce reduction expenses. 5.2 Payments to other operators 6,140 6,461 6,902 Payments to other network operators consist of expenses in respect of interconnection with other network operators. Telkom Annual Report Selling, general and administrative expenses 2,832 3,970 3,904 Selling and administrative expenses 692 1,329 1,108 Maintenance 1,608 1,900 1,996 Marketing Bad debts (refer to note 16)

196 Notes to the annual financial statements (continued) 5. Operating expenses (continued) 5.4 Services fees 2,022 2,236 2,410 Facilities and property management 1,107 1,140 1,221 Consultancy services Security and other Auditors remuneration Audit services Company auditors Current year Prior year underprovision 2 3 Other auditors current year Audit related services 8 Company auditors current year 6 Other auditors 2 Other services 1 The increase in security costs is mainly attributable to the Company s drive to minimise cable theft. 5.5 Operating leases Land and Buildings Equipment Vehicles Depreciation, amortisation and write-offs 4,364 3,583 3,732 Depreciation of property, plant and equipment (refer to note 9) 3,790 2,994 3,062 Amortisation of intangible assets (refer to note 10) Write-offs of property, plant and equipment and intangible assets In recognition of the changed usage patterns of certain items of property, plant and equipment and intangible assets, the Company reviewed their remaining useful lives as at March 31. The assets affected were certain items included in Support equipment. The revised estimated useful lives of these assets as set out below, resulted in a decrease of the current year depreciation and amortisation charges of R196 million (2007: R942 million) Rm Rm Rm 302 Previous life Years Revised life Years Property, plant and equipment Support equipment

197 Notes to the annual financial statements (continued) 6. Investment income 2,733 3,202 3,739 Interest received Dividend received from joint venture 2,250 2,700 2,970 Dividend received from subsidiaries Included in investment income is an amount of R142 million (2007: R196 million; 2006: R335 million) which relates to interest earned from financial assets not at fair value through profit or loss. The increase in investment income is as a result of higher dividends being received from Rossal No 65 (Proprietary) Limited, Acajou Investments (Proprietary) Limited and Vodacom Group (Proprietary) Limited Rm Rm Rm 7. Finance charges and fair value movements 1,320 1,027 1,289 Finance charges on interest-bearing debt 1,222 1,142 1,499 Local debt 1,382 1,303 1,675 Foreign debt 9 Less: Finance costs capitalised (169) (161) (176) Foreign exchange gains and losses and fair value movement 98 (115) (210) Foreign exchange (gains)/losses (78) Fair value adjustments on derivative instruments 176 (173) (326) Capitalisation rate 13.9% 14.8% 12.6% Included in finance charges is an amount of R1,499 million (2007: R1,142 million; 2006: R1,222 million) which relates to interest paid on financial liabilities not measured at fair value through profit or loss. Telkom Annual Report

198 Notes to the annual financial statements (continued) 8. Taxation 2,838 2,690 2,599 South African normal company taxation 2,449 1,874 1,879 Current tax 2,459 1,907 1,879 Overprovision for prior year (10) (33) Deferred taxation Temporary differences normal company taxation Temporary difference Secondary taxation on companies ( STC ) tax credits utilised/(raised) 51 (41) 157 Change in tax rate (55) (Overprovision)/underprovision in prior year (86) 1 Secondary taxation on companies The net deferred taxation expense results mainly from the extension of useful lives, offset slightly by an increase in the STC tax credits. The STC expense was provided for at a rate of 10% (12.5% before October 1, 2007) on the amount by which dividends declared by the Company exceeds dividends received. Deferred tax expense relating to STC credits are provided for at a rate of 10% Rm Rm Rm Reconciliation of taxation rate % % % Effective rate South African normal rate of taxation Adjusted for: (4.0) (4.8) (4.4) Change in tax rate (0.5) Exempt income (6.6) (8.3) (10.6) Disallowable expenditure STC tax credits utilised/(raised) 0.4 (0.4) 1.5 STC tax charge Net overprovision for prior year (0.8) (0.3) 0.0 The Company has historically filed, and continues to file, all required income tax returns. Management believes that the principles applied in determining the Company s tax obligations are consistent with the principles and interpretations of South Africa s tax laws. 304

199 Notes to the annual financial statements (continued) 9. Property, plant and equipment Accumulated Carrying Accumulated Carrying Accumulated Carrying Cost depreciation value Cost depreciation value Cost depreciation value Rm Rm Rm Rm Rm Rm Rm Rm Rm Freehold land and buildings 4,419 (1,809) 2,610 4,381 (1,829) 2,552 4,581 (1,988) 2,593 Leasehold buildings 509 (269) (299) (348) 186 Network equipment 48,220 (24,967) 23,253 49,780 (25,774) 24,006 52,952 (27,366) 25,586 Support equipment 3,396 (2,262) 1,134 3,584 (2,209) 1,375 3,863 (2,377) 1,486 Furniture and office equipment 330 (226) (236) (265) 107 Data processing equipment and software 4,712 (2,933) 1,779 4,758 (3,022) 1,736 4,951 (3,103) 1,848 Under construction 1,316 1,316 2,530 2,530 3,362 3,362 Other 276 (224) (347) (371) ,178 (32,690) 30,488 66,330 (33,716) 32,614 71,091 (35,818) 35,273 A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build program with focus on Next Generation Network technologies has resulted in an increase in property, plant and equipment additions which is expected to continue over the next few years. Fully depreciated assets with a cost of R498 million (2007: R1,225 million; 2006: R3,724 million) were derecognised in the 2008 financial year. This has reduced both the cost price and accumulated depreciation of property, plant and equipment. Property, plant and equipment with a carrying value of R188 million (2007: R203 million; 2006: R246 million) are pledged as security. Details of the loans are disclosed in note 22. The carrying amounts of property, plant and equipment can be reconciled as follows: Carrying Carrying value at Write-offs value at beginning and Depre- end of of year Additions Transfers reversals Disposals ciation year Rm Rm Rm Rm Rm Rm Rm 2008 Freehold land and buildings 2, (3) (8) (168) 2,593 Leasehold buildings (48) 186 Network equipment 24,006 2,693 1,308 (96) (88) (2,237) 25,586 Support equipment 1, (7) (256) 1,486 Furniture and office equipment (29) 107 Data processing equipment and software 1, (14) (303) 1,848 Under construction 2,530 2,588 (1,725) (31) 3,362 Other (21) ,614 6,044 (76) (151) (96) (3,062) 35,273 Telkom Annual Report Freehold land and buildings 2, (8) 17 (169) 2,552 Leasehold buildings 240 (14) (29) 197 Network equipment 23,253 2, (190) (240) (2,263) 24,006 Support equipment 1, (13) (203) 1,375 Furniture and office equipment (11) 109 Data processing equipment and software 1, (48) (9) (289) 1,736 Under construction 1,316 2,163 (912) (37) 2,530 Other (1) (30) ,488 5, (233) (254) (2,994) 32,614

200 Notes to the annual financial statements (continued) 9. Property, plant and equipment (continued) 2006 Carrying Carrying value at Write-offs value at beginning and Depre- end of of year Additions Transfers reversals Disposals ciation year Rm Rm Rm Rm Rm Rm Rm Freehold land and buildings 2, (22) (21) (202) 2,610 Leasehold buildings (66) 240 Network equipment 23, ,035 (75) (2,813) 23,253 Support equipment 1, (7) (216) 1,134 Furniture and office equipment (1) (29) 104 Data processing equipment and software 1, (7) (440) 1,779 Under construction 1,084 2,933 (2,626) (75) 1,316 Other 67 9 (24) 52 30,559 3,927 (187) (21) (3,790) 30,488 Full details of land and buildings are available for inspection at the registered offices of the Company. The Company does not have temporary idle property, plant and equipment. An amount of R88 million under disposals relates to the derecognition of Customer Premises Equipment at the start of the lease. These disposals are as a result of the Company applying IFRIC4 which requires assessment of whether an arrangement contains a lease. The leases are classified as a finance lease in terms of IAS17 since they transfer significant risks and rewards of ownership to the customer Accumulated Carrying Accumulated Carrying Accumulated Carrying Cost amortisation value Cost amortisation value Cost amortisation value Rm Rm Rm Rm Rm Rm Rm Rm Rm 10. Intangible assets Trademarks and copyrights 52 (52) 52 (52) 197 (59) 138 Software 4,420 (2,616) 1,804 5,306 (2,913) 2,393 6,239 (3,312) 2,927 Under construction 1,063 1,063 1,109 1, ,535 (2,668) 2,867 6,467 (2,965) 3,502 7,177 (3,371) 3,

201 Notes to the annual financial statements (continued) Carrying Carrying value at Write-offs value at beginning and Amorti- end of of year Additions Transfers reversals Disposals sation year Rm Rm Rm Rm Rm Rm Rm 10. Intangible assets (continued) The carrying amounts of intangible assets can be reconciled as follows: 2008 Trademarks and copyrights 144 (6) 138 Software 2, (2) (402) 2,927 Under construction 1, (612) (109) 741 3, (111) (408) 3, Software 1, (4) (305) 2,393 Under construction 1, (636) (47) 1,109 2,867 1,052 (61) (51) (305) 3, Software 1, (18) (387) 1,804 Under construction (816) 1,063 2, (18) (387) 2,867 There are no intangible assets whose title is restricted, or that have been pledged as security for liabilities at March 31, Intangible assets that are material to the Company consist of Software whose average remaining amortisation period is 5.9 years (2007: 6.58 years; 2006: 3.8 years). No intangible asset has been assessed as having an indefinite useful life. Telkom Annual Report

202 Notes to the annual financial statements (continued) Rm Rm Rm 11. Investments 2, ,883 Joint venture Vodacom Group (Proprietary) Limited 50% shareholding at cost (R50) Special purpose entity cell captive Cost 1, Subsidiaries ,348 TDS Directory Operations (Proprietary) Limited 64.90% shareholding at cost Swiftnet (Proprietary) Limited % shareholding at cost Prime minus 1% cumulative redeemable preference shares 20 Loan 2 Rossal No 65 (Proprietary) Limited 100% shareholding at cost (R100) Acajou Investments (Proprietary) Limited 100% shareholding at cost (R100) Intekom (Proprietary) Limited % shareholding at cost Loan 3 Impairment (13) Q-Trunk (Proprietary) Limited 100% shareholding at cost Loan Impairment (44) (40) (36) Telkom Media (Proprietary) Limited % shareholding at cost (R2,868) Loan 326 Impairment of loan (217) Africa Online Limited % shareholding at cost Impairment of investment (12) Loan Multi-Links Telecommunications Limited* Loan 840 Telkom Communications International (Proprietary) Limited 100% shareholding at cost (R12) Telkom International (Proprietary) Limited* 100% shareholding at cost (R100) Loan 1,985 *The 75% shareholding in Multi-Links Telecommunications Limited is an indirect investment through Telkom International (Proprietary) Limited. The aggregate directors valuation of the above investments is R7,658 million (2007: R6,690 million; 2006: R8,751 million) based on net asset values.

203 Notes to the annual financial statements (continued) 11. Investments (continued) Telkom Media (Proprietary) Limited ( Telkom Media ) On August 31, 2006 Telkom created a new subsidiary, Telkom Media with a Black Economic Empowerment ( BEE ) shareholding. The Independent Communications Authority of South Africa ( ICASA ) awarded Telkom Media a commercial satellite and cable subscription broadcast licence on September 12, The BEE shareholders are Videovision Entertainment, MSG Afrika Media (Proprietary) Limited and WDB Investment Holdings (Proprietary) Limited. As at March 31, 2008, Telkom had a 75% shareholding in Telkom Media, however, in a recent clarification and refinement of its strategy the board has taken the decision to substantially reduce its investment in Telkom Media and will be investigating all opportunities to do this in the best interest of Telkom shareholders and all other stakeholders. Swiftnet (Proprietary) Limited ( Swiftnet ) Swiftnet is in breach of its licence that requires it to have at least 30% of its shares held by black economic empowerment individuals or entities. ICASA has required Swiftnet to remedy the breach of its licence, which expired on August 24, On February 14, 2007 Telkom announced that it had entered into an agreement to sell a 30% stake in Swiftnet to the Radio Surveillance Consortium, a group of empowerment investors, for R55 million following a competitive sale process run by an independent adviser. The transaction would not have required any financial support or facilitation from Telkom. The transaction received Competition Commission approval on May 28, 2007, but was not approved by ICASA. Swiftnet is currently seeking black economic empowered individuals or entities who would be acceptable to ICASA. Swiftnet met with ICASA on January 28, 2008 to discuss its specific licence terms and conditions. Swiftnet has submitted its comments on the draft licence terms and conditions to ICASA that ICASA sent to Swiftnet during October Swiftnet, assisted by Telkom as its sole shareholder, has had a further meeting with ICASA on February 27, It was decided that the draft amended licence that ICASA sent to Swiftnet during October 2007 would not form the basis of the conversion process, but instead the original licence issued to Swiftnet in August 1995 would be used as the basis for licence conversion. The transaction is still subject to ICASA approval. With regard to shareholder issues, ICASA indicated that there is currently no agreement within the industry as to acceptable BEE shareholding percentages for all licensees. ICASA indicated that the shareholding issue for the Swiftnet licence would need to be in line with BEE values applicable to other similar licensees. Incorporation The subsidiaries and joint venture are all incorporated in the Republic of South Africa, with the exception of Telkom Communications International (Proprietary) Limited and Africa Online Limited, that are incorporated in the Republic of Mauritius as well as Multi-Links Telecommunications Limited which is incorporated in Nigeria Rm Rm Rm Available-for-sale Unlisted investment Rascom 0.69% (2007: 0.69%; 2006: 0.70%) interest in Regional African Satellite Communications Organisation, headquartered in Abidjan, Ivory Coast, at cost. Cost Impairment (1) (1) (1) Loans and receivables 43 Tel.One (Pvt) Limited 32 The loan to Tel.One (Pvt) Limited was unsecured, interest-free and was repayable through traffic revenue from June 2004 over five years. R41 million traffic was set off against the loan in the 2007 financial year, hence settling the full amount of the loan in advance. Telkom Annual Report Other receivables 11 Less: Short-term investments (16) Tel.One (Pvt) Limited (14) Swiftnet (Proprietary) Limited loan (2) Intekom (Proprietary) Limited (Loan of RNil) (2007: RNil; 2006: R3 million, fully impaired) Q-Trunk (Proprietary) Limited (Loan of R26 million) (2007: R30 million; 2006: R34 million, fully impaired)

204 Notes to the annual financial statements (continued) 12. Financial instruments and risk management Exposure to continuously changing market conditions has made management of financial risk critical for the Company. Treasury policies, risk limits and control procedures are continuously monitored by the Board of Directors through its audit and risk management committee. The Company holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage currency and interest rate risks. In addition, financial instruments for example trade receivables and payables arise directly from the Company s operations. The Company finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The Company uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are principally interest rate swaps, currency swaps and forward exchange contracts. The Company does not speculate in derivative instruments. The table below sets out the classification of financial assets and liabilities At fair value through profit Financial or loss liabilities at Total held for ammortised Held-to- Loans and carrying Fair trading cost maturity receivables value Value Notes Rm Rm Rm Rm Rm Rm 2008 Classes of financial instruments per Balance Sheet Assets ,035 7,743 7,743 Trade and other receivables* 16 6,593 6,593 6,593 Finance lease receivable Other financial assets Forward exchange contracts Cash and cash equivalents Liabilities (168) (18,285) (18,453) (18,968) Interest bearing debt 22 (13,362) (13,362) (13,877) Trade and other payables 26 (4,923) (4,923) (4,923) Other financial liabilities (168) (168) (168) Forward exchange contracts 17 (168) (168) (168) 275 (18,285) 265 7,035 (10,710) (11,225) 310

205 Notes to the annual financial statements (continued) 12. Financial instruments and risk management (continued) At fair value through profit Financial and loss liabilities at Total held for ammortised Held-to- Loans and carrying Fair trading cost maturity receivables value Value Notes Rm Rm Rm Rm Rm Rm Classification of financial assets and liabilities (continued) 2007 Classes of financial instruments per Balance Sheet Assets ,931 6,367 6,367 Trade and other receivables* 16 5,755 5,755 5,755 Finance lease receivable Other financial assets Bills of exchange Forward exchange contracts Cash and cash equivalents Liabilities (155) (13,318) (13,473) (14,834) Interest bearing debt 22 (98) (8,985) (9,083) (10,444) Trade and other payables 26 (4,333) (4,333) (4,333) Other financial liabilities (57) (57) (57) Interest rate swaps 17 (26) (26) (26) Forward exchange contracts 17 (31) (31) (31) 74 (13,318) 207 5,931 (7,106) (8,467) 2006 Classes of financial instruments per Balance Sheet Assets 256 8,785 9,041 9,041 Trade and other receivables* 16 5,553 5,553 5,553 Other financial assets Bills of exchange Forward exchange contracts Cash and cash equivalents 18 3,232 3,232 3,232 Liabilities (314) (13,820) (14,134) (16,108) Telkom Annual Report Interest bearing debt 22 (108) (9,780) (9,888) (11,862) Trade and other payables 26 (4,040) (4,040) (4,040) Other financial liabilities (206) (206) (206) Interest rate swaps 17 (106) (106) (106) Forward exchange contracts 17 (100) (100) (100) (58) (13,820) 8,785 (5,093) (7,067) *Trade and other receivables are disclosed net of prepayments of R266 million (2007: R165 million; 2006: R75 million).

206 Notes to the annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.1 Fair value of financial instruments Fair value of all financial instruments noted in the balance sheet approximates carrying value except as disclosed below. The estimated net fair values as at March 31, 2008, have been determined using available market information and appropriate valuation methodologies as outlined below. This value is not necessarily indicative of the amounts that the Company could realise in the normal course of business. Derivatives are recognised at fair value. The fair value of derivatives approximates their carrying amount. The fair value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their carrying amount due to the short-term maturities of these instruments. The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future payments discounted at market interest rates. The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is used. These amounts reflect the approximate values of the net derivative position at the balance sheet date. The fair values of listed investments are based on quoted market prices Interest rate risk management Interest rate risk arises from the repricing of the Company s forward cover and floating rate debt as well as incremental funding or new borrowings and the refinancing of existing borrowings. The Company s policy is to manage interest cost through the utilisation of a mix of fixed and floating rate debt. In order to manage this mix in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated peak additional borrowings, the Company makes use of interest rate derivatives as approved in terms of the Company policy limits. Fixed rate debt represents approximately 57.03% (2007: 98.83%; 2006: 99.14%) of the total debt. The debt profile of mainly fixed rate debt has been maintained to limit the Company s exposure to interest rate increases given the size of the Company s debt portfolio. There were no material changes in the policies and processes for managing and measuring interest rate risk in the 2008 financial year. The table below summarises the interest rate swaps outstanding as at March 31: Notional Weighted Average amount average maturity Currency Rm coupon rate 2008 Interest rate swaps outstanding Pay fixed Zero ZAR 0.00% 2007 Interest rate swaps outstanding Pay fixed < 1 year ZAR 1, % 2006 Interest rate swaps outstanding Pay fixed 1 5 years ZAR 1, % 312 Pay fixed The floating rate is based on the three months JIBAR, and is settled quarterly in arrears. The interest rate swaps are used to manage interest rate risk on debt instruments.

207 Notes to the annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.3 Credit risk management Credit risk arises from derivative contracts entered into with financial institutions with a range of A1 or better. The Company is not exposed to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Company from counterparties is a net favourable position of R289 million (2007: R103 million; 2006: R139 million). No collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Company limits the exposure to any counterparty and exposures are monitored daily. The Company expects that all counterparties will meet their obligations. With respect to credit risk arising from other financial assets of the Company, which comprises held-to-maturity investments, financial assets held at fair value through profit or loss, loans and receivables and available-for-sale assets, (other than equity investments), the Company s exposure to credit risk arises from a potential default by a counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Company s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management seeks to reduce the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counter party failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles. Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where appropriate. The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected future cash flows. The Company has provided a financial guarantee to Africa Online Limited for bank loans. At March 31, 2008 there was R23 million (2007: RNil million; 2006: RNil) outstanding. Telkom guarantees a certain portion of employees housing loans. The amount guaranteed differs depending on facts such as employment period and salary rates. When an employee leaves the employment of Telkom, any housing debt guaranteed by Telkom is settled before any pension payout can be made to the employee. There is no provision outstanding in respect of these contingencies. The fair value of the guarantee at March 31, 2008 was RNil (2007: RNil; 2006: RNil). There were no material changes in the exposure to credit risk and its objectives, policies and processes for managing and measuring the risk during the 2008 financial year. The maximum exposure to credit risk for financial assets at the reporting date by type of customer was: Carrying amount Rm Rm Rm Trade receivables 3,709 3,831 4,316 Business and residential 1,955 1,924 1,824 Global, corporate and wholesale 1,533 1,701 1,950 Government Other Impairment of trade receivables (183) (153) (160) Derivatives Loans receivable 45 3,008 Other receivables* 1,844 1,924 2,277 *Other receivables are disclosed net of prepayments of R266 million (2007: R165 million; 2006: R75 million). The ageing of trade receivables at the reporting date was: 5,854 5,984 10,044 Telkom Annual Report Rm Rm Rm Not past due/current 3,372 3,250 3,654 Ageing of past due but not impaired 21 to 60 days to 90 days to 120 days days ,709 3,831 4,316

208 Notes to the annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.3 Credit risk management (continued) Rm Rm Rm The ageing in the allowance for the impairment of trade receivables at reporting date was: Ageing of impaired trade receivables: Current defaulted to 60 days to 90 days to 120 days days The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 16. Included in the allowance for doubtful debts are individually impaired receivables with a balance of R32 million (2007: R49 million; 2006: R55 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Company does not hold any collateral over these balances Liquidity risk management Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk as a result of uncertain trade receivable related to cash flows as well as capital commitments of the Company. Liquidity risk is managed by Telkom s Corporate Finance division in accordance with policies and guidelines formulated by Telkom s Executive Committee. In terms of its borrowing requirements the Company ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Company maintains a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills. There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring the risk during the 2008 financial year. The table below analyses the Company s financial liabilities which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table below are the contractual undiscounted cash flows. Carrying Contractual < > 5 amount cash flows months months years years years Notes Rm Rm Rm Rm Rm Rm Rm 2008 Non-derivative financial liabilities Finance lease liabilities* , ,150 Interest bearing debt (excluding finance leases) 22 12,505 14,403 4,882 1,200 3,900 1,823 2,598 Trade and other payables 26 4,923 4,923 4, Bank overdraft Derivative financial liabilities Forward exchange contracts ,494 21,329 9,632 1,616 4,115 2,218 3, Non-derivative financial liabilities Finance lease liabilities , ,290 Interest bearing debt (excluding finance leases) 22 8,231 10,416 1,350 4,680 1,806 2,580 Trade and other payables 26 4,333 4,333 3, Derivative financial liabilities Interest rate swaps Forward exchange contracts *Excludes R183 million for vehicles. The contract disclosed under commitments commenced April 1, ,473 16,709 5,347 5, ,162 3,870

209 Notes to the annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.4 Liquidity risk management (continued) Carrying Contractual < > 5 amount cash flows months months years years years Notes Rm Rm Rm Rm Rm Rm Rm 2006 Non-derivative financial liabilities Finance lease liabilities , ,428 Interest bearing debt (excluding finance leases) 22 9,021 11, ,101 4,581 1,792 2,570 Trade and other payables 26 4,040 4,040 3, Derivative financial liabilities Interest rate swaps Forward exchange contracts ,134 17,869 4,336 2,566 4,818 2,151 3, Foreign currency exchange rate risk management The Company manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial instruments suitable to the Company s risk exposure. Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Company s operations and liabilities. The Company also enters into forward foreign exchange contracts to economically hedge interest expense and purchase and sale commitments denominated in foreign currencies (primarily USDs and Euros). The purpose of the Company s foreign currency hedging activities is to protect the Company from the risk that the eventual net flows will be adversely affected by changes in exchange rates. There were no material changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and measuring the risk during the 2008 financial year. The following table details the foreign exchange forward contracts outstanding at year end: Foreign contract value Forward value Fair value To buy m Rm Rm 2008 Currency USD Euro 173 1, Other Currency USD 165 1,209 2 Euro Other ,004 2,280 Telkom Annual Report Currency USD 174 1,134 (51) Euro (29) Other (9) 1,895

210 Notes to the annual financial statements (continued) Foreign contract value Forward value Fair value To sell m Rm Rm 12. Financial instruments and risk management (continued) 12.5 Foreign currency exchange rate risk management (continued) 2008 Currency USD (67) Euro (98) Other (3) 2007 Currency USD Euro (5) Other Currency USD Euro (3) Other The Company has various monetary assets and liabilities in currencies other than the Company s functional currency. The following table represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Company according to the different foreign currencies. 1,501 1,517 1,325 Euro USD Other Rm Rm Rm 2008 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African Rand Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African Rand Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African Rand 213 (4) 148 Currency swaps There were no currency swaps in place at March 31, 2008, 2007 and 2006.

211 Notes to the annual financial statements (continued) 12. Financial instruments and risk management (continued) Sensitivity analysis Interest rate risk The sensitivity analysis below have been determined based on the exposure to interest rates for derivatives and other financial liabilities at the balance sheet date. A 100 basis point increase or decrease is used when reporting interest rate risk and represents management s assessment of the reasonably possible change in interest rates. If interest rates had been 100 basis points higher/lower and all other variables were held constant, the Company s profit for the year ended March 31, 2008 would decrease/increase by R3 million (2007: decrease/increase by RNil million; 2006: decrease/increase by R9 million). Foreign exchange currency risk The following table illustrates the sensitivity to a reasonably possible change in the exchange rates, with all other variables held constant, to the Company s profit before tax. Increase/decrease Effect on profit in foreign before tax exchange currency increase/(decrease) % Rm 2008 Rand appreciates USD +10 (117) EURO +10 (42) Rand depreciates USD EURO Rand appreciates USD +10 (18) EURO +10 (27) Rand depreciates USD EURO Rand appreciates USD +10 (11) EURO +10 (17) Rand depreciates USD EURO Telkom Annual Report

212 Notes to the annual financial statements (continued) 12. Financial instruments and risk management (continued) 12.7 Exchange rate table (closing rate) United States Dollar Euro Pound Sterling Swedish Krona Japanese Yen Capital management The Board s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Company monitors capital using net debt to equity ratio. The Company s policy is to keep the debt equity ratio between 50% and 70%. Included in net debt are interest bearing loans and borrowings, other financial liabilities, less cash and cash equivalents and other financial assets. The Company also monitors the level of dividends to ordinary shareholders. Telkom plans on continuing its share buy back strategy based on certain criteria, including market conditions, availability of cash and other investments opportunities and needs. All of Telkom s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for dividends. No dividend may be declared to a holder of the class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of all ordinary shares. Telkom s current dividend policy aims to provide shareholders with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable us to achieve our strategy. Telkom may revise its dividend policy from time to time. The determination to pay dividends, and the amount of the dividends, will depend upon, among other things the earnings, financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy back plans. The Company has access to financing facilities, the total unused amount which is R5,894 million at the balance sheet date. Capital comprises equity attributable to equity holders of the parent. There were no changes in the Company s approach to capital management during the year. The Company is not subject to externally imposed capital requirements. The net debt to equity ratio is as follows: Rm Rm Rm Rm Rm Rm Non-current portion of interest-bearing debt 7,245 3,308 7,336 Current portion of interest-bearing debt 2,643 5,775 6,026 Other financial liabilities Less: Cash and cash equivalents (3,232) (176) (442) Less: Other financial assets (256) (229) (443) Net debt 6,606 8,735 12,645 Equity 23,690 25,714 26, Net debt to equity ratio 28% 34% 47%

213 Notes to the annual financial statements (continued) 13. Finance lease receivables The Company provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to specific customers. The disclosed information relates to certain customer arrangements which were assessed to be finance leases in terms of IAS17. In terms of IFRIC4 the Company has concluded that some of its voice and non-voice service arrangements with its customers contain a lease. IFRIC4 required the entity to assess existing arrangements at the beginning of the earliest period for which comparative information under IFRS is presented on the basis of facts and circumstances existing at the beginning of that period. The effect of the application of this interpretation was not considered material for 2006, and therefore all cumulative adjustments were made during the 2007 financial year. Total < 1 year 1 5 years > 5 years Rm Rm Rm Rm 2008 Minimum lease payments Lease payments receivable Unearned finance income (80) (30) (50) Present value of minimum lease payments Lease receivables Minimum lease payments Lease payments receivable Unearned finance income (66) (21) (45) Present value of minimum lease payments Lease receivables Deferred taxation (469) (990) (1,347) Opening balance (356) (469) (990) Income statement movements (113) (521) (357) Temporary differences (199) (520) (412) Capital allowances 109 (467) (446) Provisions and other allowances (257) (94) 191 STC tax credits raised/(utilised) (51) 41 (157) Over provision/(under provision) prior year 86 (1) Change in tax rate 55 The balance comprises: (469) (990) (1,347) Capital allowances (2,059) (2,527) (2,870) Provisions and other allowances 1,291 1,197 1,340 STC tax credits Deferred tax balance is made up as follows: (469) (990) (1,347) Telkom Annual Report Deferred tax assets Deferred tax liabilities (768) (1,330) (1,530) Unutilised STC credits 2,393 2,718 1,830 The deferred tax asset represents STC credits on past dividends received. The deferred tax asset for the current period is calculated using the revised STC rate of 10% (previously 12.5%) as announced by the Minister of Finance. The deferred tax asset will be released as a tax expense when the dividends are declared. The asset is recognised as it is considered probable that it will be utilised in the future, given the Company s dividend policy. The deferred tax liability increased mainly due to the increase in the difference between the carrying value and tax base of assets, resulting from the change in the estimate of useful lives of assets.

214 Notes to the annual financial statements (continued) 15. Inventories Gross inventories ,072 Write-down of inventories to net realisable value (63) (133) (199) Inventories consist of the following categories: Installation material, maintenance material and network equipment Merchandise Write-down of inventories to net realisable value Opening balance Charged to selling, general and administrative expenses Inventories written-off (29) (82) (98) Inventory levels as at March 31, 2008 and 2007 have increased due to the roll-out of the Next Generation Network and increased inventory levels, required to improve customer service. 16. Trade and other receivables 5,628 5,920 6,859 Trade receivables 3,709 3,831 4,316 Gross trade receivables 3,893 3,984 4,476 Impairment of receivables (184) (153) (160) Prepayments and other receivables 1,919 2,089 2,543 Impairment of receivables Opening balance Charged to selling, general and administrative expenses Receivables written-off (173) (168) (210) Refer to note 12 for detailed credit risk analysis Rm Rm Rm 17. Other financial assets and liabilities Other financial assets consist of: At fair value through profit or loss Bills of exchange Derivative instruments (refer to note 12) Bills of exchange The fair value of bills of exchange has been derived at with reference to BESA quoted prices. Other financial liabilities consist of: At fair value through profit or loss Derivative instruments (206) (57) (168) Derivative instruments are made up of forward exchange contracts of R168 million (2007: R26 million interest rate swaps and R31 million forward exchange contracts; 2006: R106 million interest rate swaps and R100 million forward exchange contracts).

215 Notes to the annual financial statements (continued) Rm Rm Rm 18. Net cash and cash equivalents 3, Cash shown as current assets 3, Cash and bank balances Short-term deposits 3, Credit facilities utilised (41) Undrawn borrowing facilities 6,529 6,566 5,894 The undrawn borrowing facilities are unsecured, when drawn bear interest at a rate that will be mutually agreed between the borrower and lender at the time of drawdown, have no specific maturity date and are subject to annual review. The facilities are in place to ensure liquidity. At March 31, 2008, R2,000 million of these undrawn facilities were committed. Borrowing powers To borrow money, Telkom s directors may mortgage or encumber Telkom s property or any part thereof and issue debentures, whether secured or unsecured, whether outright or as security for debt, liability or obligation of Telkom or any third party. For this purpose the borrowing powers of Telkom are unlimited, but are subject to restrictive financial covenants of the TL20 loan and the conditions and covenants of the Bridge Loan facility indicated on note Rm Rm Rm 19. Share capital and premium Authorised and issued share capital and share premium are made up as follows: Authorised 10,000 10,000 10, ,999,998 ordinary shares of R10 each 10,000 10,000 10,000 1 Class A ordinary share of R10 1 Class B ordinary share of R10 Issued and fully paid 6,791 5,329 5, ,784,184 (2007: 532,855,528; 2006: 544,944,899) ordinary shares of R10 each 5,449 5,329 5,208 1 (2007: 1; 2006: 1) Class A ordinary share of R10 1 (2007: 1; 2006: 1) Class B ordinary share of R10 Share premium 1,342 The following table illustrates the movement in the number of shares issued: Number of Number of Number of shares shares shares Telkom Annual Report 2008 Shares in issue at beginning of year 557,031, ,944, ,855,530 Shares bought back and cancelled* (12,086,920) (12,089,371) (12,071,344) Shares in issue at end of year 544,944, ,855, ,784,186 Full details of the voting rights of ordinary, class A and class B shares are documented in the Articles of Association of the Company. Share buy-back During the financial year Telkom bought back 12,071,344 ordinary shares at a total consideration of R1,647 million. This reduced Share capital by R121 million and Retained earnings by R1,526 million. During the year ended March 31, 2007, Telkom bought back 12,089,371 ordinary shares at a total consideration of R1,596 million. This reduced Share capital by R120 million, Share premium by R1,342 million and Retained earnings by R134 million. During the year ended March 31, 2006, Telkom bought back 12,086,920 ordinary shares at a total consideration of R1,502 million. This reduced Share capital by R121 million and Share premium by R1,381 million. *As of March 31, 2008, 4,444,138 of these shares has not yet been cancelled from the issued share capital by the Registrar of Companies. 321 Capital management Refer to note 12 for detailed capital management disclosure.

216 Notes to the annual financial statements (continued) Rm Rm Rm Treasury shares (1,786) (1,778) (1,642) At March 31, 2008, 10,493,141 (2007: 12,237,016; 2006: 12,687,521) and 10,849,058 (2007: 10,849,058; 2006: 10,849,058) ordinary shares in Telkom, with a fair value of R1,377 million (2007: R2,031 million; 2006: R2,038 million) and R1,423 million (2007: R1,801 million; 2006: R1,743 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively. The shares held by Rossal No 65 (Proprietary) Limited are reserved for issue in terms of the Telkom Conditional Share Plan ( TCSP ). In addition the Board of directors agreed that, subject to JSE Listings Requirements, the treasury shares held by Acajou Investments (Proprietary) Limited be made available to the TCSP to make up for the current shortfall in the share scheme after the additional grants made during the current year (refer to note 21). The reduction in the number of treasury shares is due to 1,743,875 (2007: 450,505; 2006: 26,669) shares that vested in terms of the TCSP during the current year. The fair value of these shares at the date of vesting was R301 million (2007: R59 million; 2006: R3 million). 21. Share-based compensation reserve This reserve represents the cumulative fair value of the equity-settled share-based payment transactions recognised in employee expenses over the vesting period of the equity instruments granted to employees in terms of the Telkom Conditional Share Plan (refer to note 24). The Telkom Board approved the fourth enhanced allocation of shares to employees on September 4, 2007, with a grant date of September 27, 2007, the day that the employees and the Company shared a common understanding of the terms and conditions of this grant. A total of 6,089,810 shares were granted. The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007, with a grant date of September 27, The number of additional shares granted with respect to the 2006 allocation is 4,966,860. No consideration is payable on the shares issued to employees, but performance criteria will have to be met in order for the granted shares to vest. The ultimate number of shares that will vest may differ based on certain individual and Telkom performance conditions being met. The related compensation expense is recognised over the vesting period of the shares granted, commencing on the grant date. The following table illustrates the movement within the Share-based compensation reserve: Balance at beginning of year Net increase in equity Employee cost* Accelerated vesting of shares (37) Vesting and transfer of shares (35) (136) Balance at end of year At March 31, 2008 the estimated total compensation expense to be recognised over the vesting period was R2,151 million (2007: R580 million; 2006: R381 million), of which R522 million (2007: R141 million; 2006: R120 million) was recognised in employee expenses for the year. *The increase in the employee cost in the current financial year is mainly a result of the additional share allocations (refer to note 24).

217 Notes to the annual financial statements (continued) 22. Interest-bearing debt Long-term interest bearing debt 7,245 3,308 7,336 Total interest-bearing debt 9,888 9,083 13,362 Gross interest-bearing debt (refer to note 12) 11,584 10,416 14,403 Discount on debt instruments issued (2,563) (2,185) (1,898) Finance leases Less: Current portion of interest-bearing debt (2,643) (5,775) (6,026) Local debt (2,640) (5,771) (6,000) Locally registered Telkom debt instruments (2,211) (4,432) Call borrowings (2,600) Commercial paper bills (429) (1,339) (3,400) Foreign debt (3) Finance leases (4) (26) Total interest-bearing debt is made up as follows: 9,888 9,083 13,362 (a) Local debt 8,936 8,125 12,365 Locally registered Telkom debt instruments 8,507 6,786 8,164 Name, maturity, rate p.a., nominal value Rm Rm Rm TK01, 2008, 10%, RNil (2007: R4,680 million; 2006: R4,689 million) 4,230 4,432 TL06, 2006, 10.5%, RNil (2007: RNil; 2006: R2,100 million) 2,103 TL20, 2020, 6%, R2,500 million (2007: R2,500 million; 2006: R2,500 million) 1,214 1,246 1,283 PP02, 2010, 0%, R430 million (2007: R430 million; 2006: R430 million) PP03, 2010, 0%, R1,350 million (2007: R1,350 million; 2006: R1,350 million) Call borrowings, 2009, 11,58%, R2,600 million (2007: Rnil; 2006: Rnil) 2,600 Term loans, 2010, 12,22%, R3,000 million (2007: Rnil; 2006: Rnil) 3,000 Total interest bearing debt is made up of R13,362 million debt at amortised cost (2007: R8,985 million debt at amortised cost and R98 million debt at fair value through profit or loss; 2006: R9,780 million debt at amortised cost and R108 million debt at fair value through profit or loss). Local bonds The local Telkom bonds are unsecured, but a side letter to the subscription agreement (as amended) of the TL20 bond and the R1,600 million Bridge Loan facility, included in Call borrowings contains a number of restrictive financial covenants to be maintained by the Company at the following ratios: EBITDA to net interest expense ratio of no less than 3.5:1 and net interest bearing debt to EBITDA ratio of no greater than 3.0:1 which, if not met, could result in the early redemption of the loan. The R1,600 million Bridge Loan facility and R2,000 million Term loan agreements limit the Company s ability to encumber, cede, assign, sell or otherwise dispose of a material portion of its assets without the prior written consent of the Lenders, which will not be unreasonably withheld. The TL20, PP02, and PP03 local bonds limit Telkom s ability to create encumbrances on revenues or assets, and secure any indebtedness without securing the outstanding bonds equally and rateably with such indebtedness. Telkom Annual Report Commercial paper bills 429 1,339 4,201 Rate p.a., nominal value 2008, 11.71% (2007: 9.04%; 2006: 7%), R4,383 million (2007: R1,350 million; 2006: R430 million)

218 Notes to the annual financial statements (continued) 22. Interest-bearing debt (continued) (b) Foreign debt Maturity, rate p.a., nominal value Euro: , 0.1% 0.14% (2007: 0.10% 0.14%; 2006: 0.10% 6.81%), 311 million (2007: 311 million; 2006: 311 million) (c) Finance leases The finance leases are secured by buildings with a carrying value of R174 million (2007: R197 million; 2006: R240 million) and office equipment with a book value of R14 million (2007: R6 million; 2006: R6 million) (refer to note 9). These amounts are repayable within periods ranging from 1 to 12 years. Interest rates vary between 13% and 38%. Included in long-term and short-term debt is: Debt guaranteed by the South African Government 4,315 4, A major portion of the guaranteed debt for the years ended March 31, 2007 and 2006 related to the TK01 debt instrument, however, this instrument has been redeemed in full during the year ended March 31, The Company may issue or re-issue locally registered debt instruments in terms of the Post Office Amendment Act 85 of The borrowing powers of the Company are set out as per note 18. Repayments/refinancing of current portion of interestbearing debt The repayment/refinancing of R6,026 million of the current portion of interest-bearing debt will depend on the market circumstances at the time of repayment. Management believes that sufficient funding facilities will be available at the date of repayment/refinancing Rm Rm Rm 324

219 Notes to the annual financial statements (continued) Rm Rm Rm 23. Provisions 2,631 1,203 1,445 Employee related 3,740 2,351 2,477 Annual leave Balance at beginning of year Charged to employee expenses Leave paid (61) (6) (9) Post-retirement medical aid (refer to note 24) 2,589 1,120 1,336 Balance at beginning of year 2,409 2,589 1,120 Interest cost Current service cost Expected return on plan asset (188) (257) Actuarial loss Settlement loss 4 Termination settlement (29) Plan asset initial recognition (1,720) Contributions paid (153) (78) (61) Telephone rebates (refer to note 24) Balance at beginning of year Interest cost Current service cost Past service cost 76 2 Actuarial loss 5 Benefits paid (20) (22) Bonus Balance at beginning of year Charged to employee expenses Payments made (507) (707) (569) Non-employee related Supplier dispute (refer to note 34) Balance at beginning of year 527 Net movements Other Telkom Annual Report 2008 Less: Current portion of provisions (1,149) (1,706) (1,640) Annual leave (316) (363) (364) Post-retirement medical aid (159) (185) (185) Telephone rebates (17) (26) (26) Bonus (637) (586) (490) Supplier dispute (refer to note 34) (527) (569) Other (20) (19) (6) 325

220 Notes to the annual financial statements (continued) 23. Provisions (continued) Annual leave In terms of the Company s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 22 days (previously 25 days) which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation. Bonus The bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets. The bonus is payable to all qualifying employees bi-annually after the Company s results have been made public. Supplier dispute The Company provided R569 million for its estimate of the probable liability as discussed in note 34. The net movement in the provision of R42 million consists of finance charges, fair value movements and payments made. Other Included in other provisions is an amount provided for asset retirement obligations. 24. Employee benefits The Company provides benefits for all its permanent employees through the Telkom Pension Fund and the Telkom Retirement Fund. Membership of one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate. The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory funding valuations for the retirement and pension funds are performed at intervals not exceeding three years. At March 31, 2008, the Company employed 24,879 employees (2007: 25,864; 2006: 25,575). Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension and retirement funds for each of the financial periods presented. The Telkom Pension Fund The latest actuarial valuation performed at March 31, 2008 indicates that the pension fund is in a surplus position of R84 million after unrecognised gains. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised). The last statutory funding valuation of the fund performed in March 2007, indicated that the fund is fully funded. The current contributions (plus an annual top-up lump sum if necessary) are based on that valuation. Management expects to complete the next statutory valuation in November With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. During the financial year ended March 31, 2007 a settlement event occurred in the Telkom Pension Fund whereby 106 members were transferred to the Telkom Retirement Fund. The funded status of the Telkom Pension Fund is disclosed below Rm Rm Rm 326 The Telkom Pension Fund The net periodic pension costs includes the following components: Interest and service cost on projected benefit obligations Expected return on plan assets (24) (19) (27) Recognised actuarial loss/(gain) 78 9 (16) Settlement loss/(gain) 21 (2) Asset limitation 29 Net periodic pension expense recognised Pension fund contributions The status of the pension plan obligation is as follows: At beginning of year Interest and service cost Employee contributions Benefits paid (20) (2) (3) Settlements (70) (15) Actuarial loss/(gain) 89 (28) (6) Benefit obligation at end of year

221 Notes to the annual financial statements (continued) 24. Employee benefits (continued) The Telkom Pension Fund (continued) Plan assets at fair value: At beginning of year Expected return on plan assets Benefits paid (20) (2) (3) Contributions Settlements (61) (15) Actuarial (loss)/gain (18) Plan assets at end of year Present value of funded obligation Fair value of plan assets (243) (284) (311) Funded status 38 (79) (107) Unrecognised net actuarial (loss)/gain (118) Net surplus (80) (54) (84) Asset limitation 29 Recognised net asset (80) (54) (55) Expected return on plan assets Actuarial (loss)/return on plan assets (18) Actual return on plan assets Principal actuarial assumptions were as follows: Rm Rm Rm Discount rate (%) Yield on government bonds (%) Long-term return on equities (%) Long-term return on cash (%) Expected return on plan assets (%) Salary inflation rate (%) Pension increase allowance (%) The overall long-term expected rate of return on assets is 9.75%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom Pension Fund and expected long-term return of these assets, of which South African Equities and foreign investments are the largest contributors. The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Telkom Annual Report Funding level per statutory actuarial valuation (%) The number of employees registered under the Telkom Pension Fund The fund portfolio consists of the following: Equities (%) Bonds (%) Cash (%) Foreign investments (%)* Insurance policies (%) 2 The total expected contributions payable to the pension fund for the next financial year are R7 million. *Includes offshore unit trusts.

222 Notes to the annual financial statements (continued) 24. Employee benefits (continued) The Telkom Retirement Fund The Telkom Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. Upon transfer the Government ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred. The Telkom Retirement Fund is a defined contribution fund with regards to in-service members. On retirement, an employee is transferred from the defined contribution plan to a defined benefit plan. Telkom, as a guarantor, is contingently liable for any deficit in the Telkom Retirement Fund. Moreover, all of the assets in the Fund, including any potential excess belong to the participants of the scheme. The Company is unable to benefit from the excess in the form of future reduced contributions. Telkom guaranties any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement fund. The latest actuarial valuation performed at March 31, 2008 indicates that the retirement fund is in a surplus funding position of R1,368 million after unrecognised losses. The Telkom Retirement Fund is governed by the Pension Funds Act, No. 24 of In terms of section 37A of this Act, the pension benefits payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan assets, Telkom would be required to fund the statutory deficit. The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that the Company has a potential asset with regards to this Fund. The funded status of the Telkom Retirement Fund is disclosed below: Rm Rm Rm The Telkom Retirement Fund The net periodic retirement costs include the following components: Interest and service cost on projected benefit obligations Expected return on plan assets (430) (489) (686) Recognised actuarial gain (145) Net periodic pension expense not recognised (Asset limitation) (84) (322) (193) Retirement fund contributions (refer to note 5.1) Benefit obligation: At beginning of year 4,020 4,377 6,581 Interest and service cost Benefits paid (377) (486) (488) Liability for new pensioners Actuarial loss 388 2, Benefit obligation at end of year 4,377 6,581 7,

223 Notes to the annual financial statements (continued) 24. Employee benefits (continued) The Telkom Retirement Fund (continued) Rm Rm Rm Plan assets at fair value: At beginning of year 4,477 5,973 7,661 Expected return on plan assets Benefits paid (377) (486) (488) Asset backing new pensioners liabilities Actuarial gain 1,442 1, Plan assets at end of year 5,973 7,661 7,991 Present value of funded obligation 4,377 6,581 7,101 Fair value of plan assets (5,973) (7,661) (7,991) Funded status (1,596) (1,080) (890) Unrecognised net actuarial gain/(loss) 742 (96) (478) Unrecognised net asset (854) (1,176) (1,368) Expected return on plan assets Actuarial gain on plan assets 1,442 1, Actual return on plan assets 1,872 2, Included in the fair value of plan assets is: Office buildings occupied by Telkom Telkom bonds Telkom shares The Telkom Retirement Fund invests its funds in South Africa and internationally. Twelve fund managers invest in South Africa and five of these managers specialise in trades with bonds on behalf of the Retirement Fund. The international investment portfolio consists of global equity and hedged funds. Principal actuarial assumptions were as follows: Discount rate (%) Yield on government bonds (%) Long-term return on equities (%) Long-term return on cash (%) Expected return on plan assets (%) Pension increase allowance (%) The overall long-term excepted rate of return on assets is 10.3%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the The Telkom Retirement Fund and expected long-term return on these assets, of which South African equities, foreign investments and South African fixed interest bonds are the largest contributors. Telkom Annual Report

224 Notes to the annual financial statements (continued) Employee benefits (continued) The Telkom Retirement Fund (continued) The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Funding level per statutory actuarial valuation (%) The number of pensioners registered under the Telkom Retirement Fund 14,323 14,451 14,255 The number of in-service employees registered under the Telkom Retirement Fund 25,320 25,766 24,939 The fund portfolio consists of the following: Equities (%) Property (%) Bonds (%) Cash (%) Foreign investments (%) The total expected contributions payable to the Retirement Fund for the next financial year are R514 million. Medical benefits The Company makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense in respect of current employees medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical benefits to current and retired employees have been actuarially determined and provided for as set out in note 23. The Company has terminated future post-retirement medical benefits in respect of employees joining after July 1, There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 ( Pre-94 ); those who retired after 1994 ( Post-94 ); and the in-service members. The Post-94 and the in-service members liability is subject to a Rand cap, which increases annually with the average salary increase. Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid benefit. The most recent actuarial valuation of the benefit was performed as at March 31, The Company has allocated certain investments to fund this liability as set out in note 11. The cell captive annuity policy qualified as a plan asset in terms of IAS19, effective June 1,

225 Notes to the annual financial statements (continued) 24. Employee benefits (continued) Medical benefits (continued) Rm Rm Rm Benefit obligation: At beginning of year 3,057 3,889 4,366 Interest cost Current service cost Actuarial loss Settlement loss 4 Termination settlement (29) Benefits paid from plan assets (94) (125) Contributions paid by the Company (153) (78) (61) Benefit obligation at end of year 3,889 4,366 4,831 Plan assets at fair value: At beginning of year 1,961 Plan asset initial recognition 1,720 Expected return on plan assets Benefits paid from plan assets (94) (125) Actuarial gain/(loss) 147 (164) Plan assets at end of year 1,961 1,929 Present value of funded obligation 3,889 4,366 4,831 Fair value of plan assets (1,961) (1,929) Funded status 3,889 2,405 2,902 Unrecognised net actuarial loss (1,300) (1,285) (1,566) Liability as disclosed in the balance sheet (refer to note 24) 2,589 1,120 1,336 Expected return on plan assets Actuarial return on plan assets 147 (164) Actual return on plan assets Principal actuarial assumptions were as follows: Discount rate (%) Expected return on plan assets (%) Salary inflation rate (%) Medical inflation rate (%) The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Contractual retirement age Average retirement age Number of members 17,872 17,119 15,526 Number of pensioners 8,665 8,494 8,430 Telkom Annual Report

226 Notes to the annual financial statements (continued) 24. Employee benefits (continued) Medical benefits (continued) The valuation results are sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of changing some of the valuation assumptions: Current assumption Decrease Increase Rm Rm Rm Medical cost inflation rate 8.0% (1.0%) 1.0% Benefit obligation 4,831 (672) 845 Percentage change (13.9%) 17.5% Service cost and interest cost 2007/ (76) 97 Percentage change (14.6%) 18.6% Discount rate 9.0% (1.0%) 1.0% Benefit obligation 4, (670) Percentage change 17.7% (13.9%) Service cost and interest cost 2007/ (35) Percentage change 7.9% (6.7%) Post-retirement mortality rate PA(90) ultimate -1 (10.00%) 10.00% Benefit obligation 4, (173) Percentage change 4.1% (3.6%) Service cost and interest cost 2007/ (17) Percentage change 3.6% (3.3%) The fund portfolio consists of the following: Equities (%) Bonds (%) 3 2 Cash and money market investments (%) Foreign investments (%) 9 9 Insurance policies (%) 8 Telephone rebates The Company provides telephone rebates to its pensioners. The most recent actuarial valuation was performed at March 31, Eligible employees must be employed by the Company until retirement age to qualify for the telephone rebates. The scheme is a defined benefit plan. The status of the telephone rebate liability is disclosed below: Rm Rm Rm Present value of unfunded obligation Unrecognised net actuarial loss* (53) (25) (156) Liability as disclosed in the balance sheet (refer to note 23) Principal actuarial assumptions were as follows: Discount rate (%) Rebate inflation rate (%) Contractual retirement age Average retirement age *Increase in unrecognised actuarial loss is due to changes in rebate inflation rate.

227 Notes to the annual financial statements (continued) Employee benefits (continued) Telephone rebates (continued) The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Number of members 19,164 19,515 18,766 Number of pensioners 11,148 10,918 10,680 Telkom Conditional Share Plan Telkom s shareholders approved the Telkom Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both operational and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting period. The vesting period for the operational employees awarded in 2004 and 2005 is 0% in year one and 33% in each of the 3 years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after 3 years. Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may differ based on certain performance conditions being met. (refer to note 20). The weighted average remaining vesting period for the shares outstanding as at March 31, 2008 is 1.25 years (2007: 1.75 years; 2006: 1.75 years). The following table illustrates the movement of the maximum number of shares that will vest to employees for the August 2004 grant: Outstanding at beginning of the year 2,943,124 2,414,207 1,883,991 Granted during the year 90 1, Forfeited during the year (67,573) (80,923) (43,790) Vested during the year (17,341) (450,505) (1,419,863) Settled during the year (444,093) Outstanding at end of the year 2,414,207 1,883, ,590 The following table illustrates the movement of the maximum number of shares that will vest to employees for the June 2005 grant: Outstanding at beginning of the year 1,930,687 1,864,041 Granted during the year 2,024,465 1,005 3,469 Forfeited during the year (62,354) (67,651) (108,177) Vested during the year (12,328) (323,946) Settled during the year (19,096) Telkom Annual Report Outstanding at end of the year 1,930,687 1,864,041 1,435,387 The following table illustrates the movement of the maximum number of shares that will vest to employees for the November 2006 grant: Outstanding at beginning of the year 1,773,361 Granted during the year 1,825, Forfeited during the year (52,127) (133,214) Outstanding at end of the year 1,773,361 1,640,980

228 Notes to the annual financial statements (continued) Employee benefits (continued) Telkom Conditional Share Plan (continued) The following table illustrates the movement of the maximum number of shares that will vest to employees relating to the additional November 2006 grant: Outstanding at beginning of the year Granted during the year 4,984,693 Forfeited during the year (172,388) Outstanding at end of the year 4,812,305 The following table illustrates the movement of the maximum number of shares that will vest to employees for the September 2007 grant: Outstanding at beginning of the year Granted during the year 6,117,163 Forfeited during the year (270,527) Outstanding at end of the year 5,846,636 The fair value of the shares granted have been calculated by an actuary using the Black-Scholes-Merton model and the following values at grant date: August 8, June 23, November 2, September 4, 2004 Grant 2005 Grant 2006 Grant 2007 Grant* Market share price (R) Dividend yield (%) *The same information was used for November 2006 additional grant The principal assumptions used in calculating the expected number of shares that will vest are as follows: Employee turnover (%) Meeting specified performance criteria (%)

229 Notes to the annual financial statements (continued) 24. Employee benefits (continued) The amounts for the current and previous four years are as follows: Rm Rm Rm Rm Rm Telkom Pension Fund Defined benefit obligation (190) (186) (281) (205) (204) Plan assets Surplus/(deficit) (38) Asset limitation (29) Unrecognised actuarial loss/(gain) (25) (23) Unrecognised/recognised net asset Experience adjustment on assets Experience adjustment on liabilities 28 (6) Telkom Retirement Fund Defined benefit obligation (3,162) (4,020) (4,377) (6,581) (7,101) Plan assets 3,540 4,477 5,973 7,661 7,991 Surplus ,596 1, Unrecognised actuarial gain/(loss) (742) Unrecognised net asset ,176 1,368 Experience adjustment on assets* 1, Experience adjustment on liabilities* 1, Medical benefits Defined benefit obligation (2,359) (3,057) (3,889) (4,366) (4,831) Plan assets 1,961 1,929 Deficit (2,359) (3,057) (3,889) (2,405) (2,902) Unrecognised actuarial (gain)/loss (46) 648 1,300 1,285 1,566 Liability recognised (2,405) (2,409) (2,589) (1,120) (1,336) Experience adjustment on assets 147 (164) Experience adjustment on liabilities Telephone rebates Defined benefit obligation (164) (177) (251) (307) (443) Unrecognised actuarial (gain)/loss (2) Liability recognised (164) (179) (198) (282) (287) Experience adjustment on liabilities (25) 2 The experience adjustments on assets and liabilities for each of the financial periods ended March 31, 2004, 2005 and 2006 has not been disclosed due to the fact it was impractical to determine the information. *During the March 31, 2007 year end Telkom actuaries have performed a full valuation while for the March 31, 2006 year end a roll forward method was used, as permitted under IAS19, to determine the present value of the benefit obligation and the fair value of the plan assets using the March 31, 2005 statutory valuation as a base applying the relevant assumptions determined by management to arrive at the present value of the benefit obligation, and the fair value of plan assets. This change in estimate resulted in a movement to the actuarial loss of R700 million and the fair value of the plan assets of R350 million in the respect of the March 31, 2007 estimates. The remaining R1,291 million is a result of the actual investment returns exceeding the expected return for the March 31, 2007 year end. Telkom Annual Report

230 Notes to the annual financial statements (continued) 25. Deferred revenue 1,985 1,846 2,294 Long-term deferred revenue Current portion of deferred revenue 1,216 1,107 1,424 Included in deferred revenue is profit on the sale and leaseback of certain Telkom buildings of R118 million, consisting of a long-term portion of R107 million and a short-term portion of R11 million (2007: R129 million; 2006: R140 million). A profit of R11 million per annum is recognised in income on a straight-line basis, over the period of the lease ending 2019 (refer to note 33). 26. Trade and other payables 4,040 4,333 4,923 Trade payables 2,304 2,761 3,267 Finance cost accrued Accruals and other payables 1,623 1,550 1,617 Accruals and other payables mainly represent amounts payable for goods received, net of Value-added Tax obligations and licence fees. Included in accruals and other payables are amounts owed to Rossal No 65 (Proprietary) Limited of RNil million (2007: R148 million; 2006: R66 million), Acajou Investments (Proprietary) Limited of RNil million (2007: R98 million; 2006: R100 million) and Intekom (Proprietary) Limited of R13 million (2007: R5 million; 2006: RNil) Rm Rm Rm 27. Reconciliation of profit for the year to cash generated from operations 13,354 12,626 12,212 Profit for the year 8,515 8,391 7,967 Finance charges and fair value movements 1,320 1,027 1,289 Taxation 2,838 2,690 2,599 Investment income (2,733) (3,202) (3,739) Interest received from debtors (134) (189) (248) Non-cash items 4,484 4,531 4,187 Depreciation, amortisation and write-offs 4,364 3,583 3,732 Cost of equipment disposed when recognising finance leases Increase in provisions 451 1, Profit on disposal of property, plant and equipment and intangible assets (93) (15) (167) Profit on disposal of investment (231) (364) Loss on disposal of property, plant and equipment and intangible assets Impairment of investments and loans (11) (17) (225) 336 (Increase)/decrease in working capital (936) (622) 157 Inventories (202) (459) (202) Accounts receivable (147) (319) (196) Accounts payable (587)

231 Notes to the annual financial statements (continued) Rm Rm Rm 28. Dividend received 1,901 2,950 3,536 Dividend received per income statement 2,398 3,006 3,597 Dividend accrued for the previous year 982 1,479 1,535 Dividend accrued for the current year (1,479) (1,535) (1,596) Dividend received consists of: 1,901 2,950 3,536 Dividend received from joint venture 1,750 2,650 2,825 Dividend received from subsidiaries Finance charges paid (1,032) (886) (842) Finance charges per income statement (1,320) (1,027) (1,289) Non-cash items Movements in interest accruals (247) (81) 49 Net discount amortised Fair value adjustment 177 (172) (275) Unrealised (loss)/gain (65) (15) Taxation paid (2,892) (3,852) (1,716) (Liability)/asset at beginning of year (1,331) (1,164) 519 South African normal company taxation (excluding deferred taxation) (2,449) (1,874) (1,879) Secondary Taxation on Companies (276) (295) (363) Taxation liability/(receivable) at end of year 1,164 (519) Dividend paid (5,017) (4,874) (5,858) Dividend payable at beginning of year (7) (4) (15) Declared during the year Dividend on ordinary shares: (5,014) (4,885) (5,863) Final dividend for 2005: 400 cents (2,228) Special dividend for 2005: 500 cents (2,786) Final dividend for 2006: 500 cents (2,714) Special dividend for 2006: 400 cents (2,171) Final dividend for 2007: 600 cents (3,198) Special dividend for 2007: 500 cents (2,665) Dividend payable at end of year Telkom Annual Report

232 Notes to the annual financial statements (continued) 32. Acquisition of subsidiaries Africa Online Limited ( Africa Online ) On February 23, 2007 Telkom acquired a 100% shareholding in Africa Online from African Lakes Corporation for a total cost of R150 million, with a resulting goodwill of R145 million. Africa Online is an internet service provider active in Cote d Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Africa Online Limited is incorporated in the Republic of Mauritius. Fair value of intangible assets 43 Less: Deferred taxation raised on intangible assets (12) Less: Net liabilities acquired (excluding fair value of intangible assets) (26) Fair value of net assets acquired 5 Goodwill 145 Purchase price 150 The goodwill has been allocated to the cash-generating units (CGU) representative of the countries in which Africa Online Limited operates. An impairment loss of R12 million was recognised in order to write goodwill down to the recoverable amount. The recoverable amount represents the value in use of the CGUs and has been determined using 11.6% discount rate Rm Rm Rm 33. Commitments Capital commitments Capital commitments authorised 6,500 7,000 7,000 Commitments against authorised capital expenditure Authorised capital expenditure not yet contracted 6,303 6,493 6,348 Capital commitments comprise of commitments for property, plant and equipment and software included in intangible assets. Management expects these commitments to be financed from internally generated cash and other borrowings FIFA World Cup commitments The FIFA World Cup commitment is an executory contract which requires the Company to develop the fixed-line components of the necessary telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of fixed-line telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the planning, management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and services. Furthermore as a National Supporter the Company owns a tier 3 sponsorship that grants the Company a package of advertising, promotional and marketing rights that are exercisable within the borders of South Africa. The total value of the commitment for the year ended March 31, 2008 amounted to USD35 million. 338

233 Notes to the annual financial statements (continued) 33. Commitments (continued) Operating lease commitments and receivables 2008 Total <1 year 1 5 years >5 years Rm Rm Rm Rm Cash flow Land and buildings Rental receivable on buildings (266) (94) (169) (3) Vehicles 1, ,204 Equipment Customer premises equipment receivable (84) (45) (39) Total cash flow 1, ,223 (2) The above figures represent actual cash flows relating to operating leases expected during the periods specified. However, due to the straight-lining effect of operating leases, the amounts that would be recognised in the income statement in the periods specified, would be as follows: Land and buildings Rental receivable on buildings (246) (92) (152) (2) Vehicles 1, ,204 Equipment Customer premises equipment receivable (84) (45) (39) Total to be recognised in the income statement 1, ,212 (1) Vehicles, equipment and customer premises equipment have no fixed annual escalation, therefore the cash flows and income statement recognition would be the same. Customer premises equipment receivable The disclosed information relates to those arrangements which were assessed to be operating leases in terms of IAS17. The comparative information for 2006 is not disclosed as it was not considered to be material Cash flow Land and buildings Rental receivable on buildings (269) (91) (174) (4) Vehicles Equipment Customer premises equipment receivable (57) (30) (27) Telkom Annual Report Total cash flow (3) Income statement Land and buildings Rental receivable on buildings (249) (90) (156) (3) Vehicles Equipment Customer premises equipment receivable (57) (30) (27) Total to be recognised in the income statement (2)

234 Notes to the annual financial statements (continued) 33. Commitments (continued) Customer premises equipment receivable (continued) 2006 Total <1 year 1 5 years >5 years Rm Rm Rm Rm Cash flow Land and buildings Rental receivable on buildings (226) (68) (156) (2) Vehicles Equipment Total cash flow 1, (1) Income statement Land and buildings Rental receivable on buildings (213) (70) (141) (2) Vehicles Equipment Total to be recognised in the income statement 1, (1) 340 Operating leases The Company leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are ten years with other leases signed for five and three years. The bulk of non-equipment related premises are for leases of three years to ten years. The majority of the leases normally contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the main lease term. The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%. Penalties in terms of the lease agreements are only payable should Telkom vacate a premises and negotiate to terminate the lease agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises. Future minimum lease payments under operating leases are included in the note below. Onerous leases for buildings, of which the Company has no further use, no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions. The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in the lease expiring on March 31, During August 2007 new terms were negotiated and approved and as a result the operating lease commitments for vehicles are based on the new agreement which expires on March 31, In accordance with this agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the five year period except for the rentals at airports which are utilised in cases of subsistence and travel as well as vehicles which are not part of the agreement. The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank. The leases of individual vehicles are renewed annually. The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25, In terms of these agreements the leases of individual equipment shall be valid for 36 months at a fixed fee for the entire period.

235 Notes to the annual financial statements (continued) 33. Commitments (continued) Operating leases (continued) Finance leases Finance lease commitments Total <1 year 1 5 years >5 years Rm Rm Rm Rm Vehicles* 2008 Minimum lease payments Finance charges (59) (20) (39) Finance lease obligation Buildings 2008 Minimum lease payments 1, ,150 Finance charges (935) (4) (548) (383) Finance lease obligation Minimum lease payments 1, ,290 Finance charges (1,051) (116) (446) (489) Finance lease obligation Minimum lease payments 2, ,428 Finance charges (1,172) (116) (452) (604) Finance lease obligation Equipment 2008 Minimum lease payments Finance charges (2) (2) Finance lease obligation Minimum lease payments 6 6 Finance charges Telkom Annual Report 2008 Finance lease obligation 6 6 *The finance lease commitments disclosed above are future commitments commencing April 1, Thus not recognised as interest-bearing debt. 341

236 Notes to the annual financial statements (continued) 33. Commitments (continued) Finance leases Finance leases on vehicles relates to the lease of Swap bodies. Swap bodies are detachable parts of the vehicle, designed according to Telkom specifications which are used as mobile storage. The lease term negotiated for the Swap bodies, which is classified as finance lease and vehicles, which is classified as operating lease, has been extended from April 2008 to April A major portion of the finance leases on buildings relates to the sale and lease-back of the Company s office buildings. The lease term negotiated for the buildings is for a period of 25 years ending The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the right to sublet part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages. Finance charges accruing on one of the Company s building leases exceed the lease payments for the next three years. Minimum lease payments for the next five years do not result in any income accruing to the Company. Finance leases on equipment relates to the reclassification of operating leases as a result of the Company applying IFRIC4, which requires assessment of whether an arrangement contains a lease. These leases are classified as finance leases in terms of IAS17 since they transfer significant risks and rewards of ownership to the Company. Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for the period of 3 years ending in Rm Rm Rm 34. Contingencies Third parties Third parties These amounts represent sundry disputes with third parties that are not individually significant and Telkom does not intend to settle. Supplier dispute Expenditure of R594 million was incurred up to March 31, 2002 for the development and installation of an integrated end-to-end customer assurance and activation system to be supplied by Telcordia. In the 2001 financial year, the agreement with Telcordia was terminated and in that year, the Company wrote off R119 million of this investment. Following an assessment of the viability of the project, the balance of the Telcordia investment was written off in the 2002 financial year. During March 2001, the dispute was taken to arbitration where Telcordia was seeking approximately USD130 million plus interest at a rate of 15.5% per year which was subsequently increased to USD172 million plus interest at a rate of 15.5% per year in the 2007 financial year for money outstanding and damages. The claims have since been revised by Telcordia to USD128 million. The parties have since reached an advanced stage in their preparation to determine the quantum payable by Telkom to Telcordia. Following the ruling by the Constitutional Court, two hearings were held at the International Dispute Resolutions Centre (IDRC). The first hearing was held in London on May 21, 2007 and was a directions hearing in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the quantum hearing. In the second hearing in London at the IDRC on June 25 and 26, 2007 the arbitrator set out a list of issues for determination of the damages. At a subsequent hearing during July 2007 in London the arbitrator ruled that the rate in terms of the Prescribed Rate of Interest will apply on both damages and debt claims, permitted Telcordia to a further amount to Telcordia s existing claims, permitted VAT to be claimed on Telcordia s claim, where applicable, and set out an agreed timetable for the future conduct of proceedings. A mediation took place, without success, during February and April In the interim the parties have agreed to the appointment by the arbitrator of a third party expert to deal with the technical issues in relation to the software that was required to be provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. The arbitrator confirmed certain dates for the compliance of procedural steps to be taken by all the parties before final dates could be agreed upon for a hearing of the evidence on the quantum.

237 Notes to the annual financial statements (continued) 34. Contingencies (continued) Supplier dispute (continued) A provision has been raised based on management s best estimate of the probable payments in this regard Rm Rm Rm Supplier dispute liability included in current portion of provisions * For the net increase in the provision refer to note 23. *USD 70 million Competition Commission If found guilty, Telkom could be required to cease these practices, divest these businesses and a maximum administrative penalty of up to 10%, calculated with reference to Telkom s annual turnover, excluding the turnover of subsidiaries and joint ventures, for the financial year prior to the compliant date, may be imposed if it is found that Telkom has committed a prohibited practice as set out in the Competition Act, 1998 (as amended). The Competition Commissions has to date not imposed the maximum penalty on any offender. This applies to the following cases: Independent Cellular Services Association of South Africa ( ICSPA ) This is a complaint in terms of the Competition Act, which was brought in ICSPA alleged that Telkom had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the premicell device installed by their members. ICSPA alleged various contraventions of the Act. Telkom provided the Competition Commission with certain information requested. They also referred the Competition Commission to its High Court application in respect of utilisation of the premicell device. The competition commission declined to refer the matter to the Competition Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003 but has done nothing since, notwithstanding that Telkom filed its answering affidavit on November 28, ICSPA has taken no further action since then. The South African Value Added Network Services ( SAVA ) On May 7, 2002 SAVA, an association of Value Added Network Services ( VANS ) providers, filed complaints against the Company at the Competition Commission under the Competition Act 89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in contravention of the Competition Act 89 of 1998, and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of Telkom s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal for adjudication. The referred complaints deal with Telkom s alleged refusal to provide telecommunications facilities to certain VANS providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with certain VANS providers. Telkom brought an application for review against the Competition Commission and the Competition Tribunal in the High Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. Telkom is of the view that the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that the Independent Communications Authority of South Africa ( ICASA ) has the requisite jurisdiction. Only the Competition Commission opposed the application and filed an answering affidavit. The application for review was heard on April 24 and 25, The High Court Judge agreed with Telkom s arguments and set aside the decision of the Competition Commission to refer the SAVA complaints (and the Omnilink complaint against Telkom discussed below) to the Competition Tribunal. The decision was made based on three grounds: The Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the Competition Commission and ICASA; The referral was out of time; The Competition Commission s reliance on a report by the Link Centre created a reasonable apprehension of bias, since some of the complainants contribute financially to the Link Centre and the Link Centre s advisory board includes employees of the complainants in the SAVA complaints. The Judge did not make a decision on the matter of jurisdiction whether ICASA or the Competition Tribunal has the right to rule on the competition matters in the communications industry. To date, the Competition Commission has not appealed the High Court ruling. Telkom Annual Report

238 Notes to the annual financial statements (continued) 34. Contingencies (continued) Competition Commission (continued) Omnilink Omnilink alleged that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom IVPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter discussed above. Orion/Telkom (Standard Bank and Edcon): Competition Tribunal In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the Competition Commission concerning Telkom offering discounts on public switched telecommunication services to corporate customers. In terms of the rules of the Competition Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion simultaneously with the filing of the complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and restraining Telkom from offering Orion s corporate customers reduced rates associated with Telkom s Cellsaver discount plan. The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the main complaint before the Competition Tribunal. To date there has been no further developments on this matter. The Internet Service Providers Association ( ISPA ) In December 2005, the ISPA, an association of Internet Service Providers ( ISPs ), filed complaints against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. The complaints deal with the cost of access to the South African Internet Exchange ( SAIX ), the prices offered by TelkomInternet, the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects of the complaint. Telkom provided the Competition Commission with the information and is awaiting the Commission s response. M-Web and Internet Solutions ( IS ) On June 29, 2005 M-Web and IS jointly lodged a complaint with the Competition Commission against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with Telkom s pricing for ADSL retail products and its IP Connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of SAIX bandwidth for ADSL users of other ISPs, the architecture of the ADSL access route and the manner in which ISPs can only connect to the ESR via IP connect as well as alleged excessive pricing for bandwidth on the international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic generated by ADSL customers of M-Web as traffic destined for the peering link and that Telkom upgrade its peering link to accommodate the increased ADSL traffic emanating from M- Web and maintain a maximum of 65% utilisation. Telkom filed its answering affidavit, and is awaiting IS/M-Web s replying affidavit. Since then Telkom has entered into a new peering agreement with IS and has responded to numerous documentation and information requests. To date there has been no further movement on this matter, either in the filing of a replying affidavit by IS/M-Web in the interim relief application or in the investigation of the matter by the Competition Commission. 344 M-Web On June 5, 2007, M-Web brought an application against Telkom for interim relief at the Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet connections. M-Web requested the Competition Tribunal to grant an order of interim relief against Telkom to charge M-Web a wholesale price for the provision of ADSL internet connections which is not higher than the lowest retail price. M-Web further applied for an order that Telkom implement the migration of end customers from Telkom PSTS (ADSL access) to M-Web without interruption of the service. Although Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to plead over as to the merits of the matter. Telkom also filed an application in the Transvaal Provincial Division of the High Court on July 3, 2007 for an order declaring that the Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by M-Web. This application was set down for hearing during the first quarter of the 2009 financial year. The parties have entered into settlement negotiations, which resulted in the withdrawal of the interim relief application by M-Web as well as withdrawal of the jurisdictional challenge by Telkom. The parties are in further negotiations.

239 Notes to the annual financial statements (continued) 34. Contingencies (continued) Salary negotiations Telkom is a party to a collective agreement on substantive matters covering the terms and conditions of employment of its fixed-line unionised employees and other non-management employees in Telkom s bargaining unit with unions for the period from April 1, 2006 to March 31, The long-term substantive agreement provides for the re-opening of negotiations in the event the consumer price index varies from the April 2006 level of 3.7% by more than 3%. Due to inflation increasing beyond this amount, Telkom re-opened the negotiations in December 2007and thus far, we have not managed to reach settlement. Given the current economic conditions, the various Trade Union Federations especially COSATU have requested a double-digit increase. If Telkom is unable to implement workforce reductions as necessary or outsourcing as planned, particularly as a result of increased competition, or experience significant labour disputes, work stoppages, increased employee expenses as a result of collective bargaining or compliance with labour laws, Telkom s business operations could be disrupted and our net profit could be reduced. Negative working capital ratio At each of the financial periods ended March 31, 2008, 2007 and 2006 the Company had a negative working capital ratio. A negative working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings and borrowings available under existing credit facilities. 35. Directors interest DD Tabata, one of Telkom s board members is a director and shareholder of Vuwa Investments (Proprietary) Limited which acquired a 40% interest in SAIL Group Limited, with effect from October 1, SAIL Group Limited is a sports marketing company that does business with Telkom. Telkom paid R17,094,844 (2007: R18,682,568) in the 2008 financial year for these goods and services. The outstanding creditors balance at March 31, 2008 was R855,000 (2007: R151,924). SL Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of Telkom s Board members, are the South African Government s representatives on Telkom s Board of Directors. At March 31, 2008, the Government held 39.42% (2007: 38.83%; 2006: 37.99%) of Telkom s shares. As at March 31, 2008 A Rhoda (B Molefe resigned March 5, 2008 and T Mahloele resigned on January 30, 2008) was the Public Investment Corporation ( PIC ) representative on Telkom s Board of Directors. As at March 31, 2008 the PIC held 15.23% (2007: 15.27%, 2006: 15.73%) of Telkom s shares. On July 3, 2008 A Rhoda resigned and was replaced by B Molefe. Beneficial Non-beneficial Number of shares Direct Indirect Direct Indirect Directors shareholding 2008 Executive RJ September 7,155 Non-executive At March 31, 2008 there was no directors shareholding. 7,155 Telkom Annual Report Non-executive TF Mosololi 455 Total Non-executive NE Mtshotshisa 88 TF Mosololi 455 Total The directors shareholding did not change between the balance sheet date and the date of issue of the financial statements.

240 Notes to the annual financial statements (continued) 35. Directors interest (continued) Rm Rm Rm Directors emoluments Executive For other services Non-executive For services as directors Performance Fringe and Fees Remuneration bonus other benefits Total R R R R R 2008 Emoluments per director: Non-executive 4,633,933 4,633,933 SL Arnold 1,124,373 1,124,373 B du Plessis 393, ,967 MJ Lamberti PSC Luthuli 502, ,117 TD Mahloele 357, ,684 KST Matthews 501, ,217 TF Mosololi 174, ,960 M Mostert*** 229, ,433 DD Tabata 250, ,583 YR Tenza 305, ,633 PL Zim 5,333 5,333 B Molefe 20,497 20,497 A Rhoda 14,286 14,286 RJ Huntley 193, ,833 Dr E Spio-Garbrah** 273, ,841 Dr VB Lawrence** 286, ,176 Executive 14,489,833 3,436,308 13,244,896 31,171,037 RJ September* 2,453,757 3,436,308 13,218,772 19,108,837 CEO 1,016,524 3,436,308 10,438,538 14,891,370 Acting CEO 1,437,233 2,780,234 4,217,467 LRR Molotsane* 12,036,076 26,124 12,062,200 Total emoluments paid by Telkom 4,633,933 14,489,833 3,436,308 13,244,896 35,804,

241 Notes to the annual financial statements (continued) 35. Directors interest (continued) Directors emoluments (continued) 2007 Emoluments per director: Performance Fringe and Fees Remuneration bonus other benefits Total R R R R R Non-executive 2,641,168 2,641,168 NE Mtshotshisa 463, ,050 SL Arnold 353, ,719 TCP Chikane 32,670 32,670 B du Plessis 213, ,367 PSC Luthuli 205, ,417 TD Mahloele 166, ,667 KST Matthews 109, ,643 TF Mosololi 214, ,417 M Mostert 232, ,417 DD Tabata 175, ,367 YR Tenza 321, ,767 PL Zim 152, ,667 Executive 2,272,785 1,653,202 3,925,987 LRR Molotsane* 2,272,785 1,653,202 3,925,987 Total emoluments paid by Telkom 2,641,168 2,272,785 1,653,202 6,567, Emoluments per director: Non-executive 2,969,158 2,969,158 NE Mtshotshisa 759, ,500 TCP Chikane 181, ,022 B du Plessis 254, ,391 PSC Luthuli 168, ,357 TD Mahloele 223, ,227 TF Mosololi 230, ,809 M Mostert 308, ,272 A Ngwezi 47,727 47,727 DD Tabata 323, ,022 YR Tenza 349, ,022 PL Zim 123, ,809 Executive 2,186,460 7,070,262 2,990,865 12,247,587 Telkom Annual Report LRR Molotsane* 1,250,747 3,442, ,675 5,602,995 SE Nxasana 935,713 3,627,689 2,081,190 6,644,592 Total emoluments paid by Telkom 2,969,158 2,186,460 7,070,262 2,990,865 15,216,745 * Included in fringe and other benefits is a pension contribution for LRR Molotsane of R4,690 (2007: R295,462; 2006: R162,597), as well as a pension contribution for RJ September of R280,261 at March 31, 2008 paid to the Telkom Retirement Fund, and a payment made in terms of a restraint of trade agreement. LRR Molotsane resigned from Telkom in April 2007 and RJ September was appointed CEO during November Included in remuneration for LRR Molotsane is a payment pursuant to a settlement agreement with Telkom. ** Foreign Directors *** In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the Telkom Board resolved that it was in the best interest of the Company and shareholders to deploy the highest quality skills currently resident in Telkom, to evaluate, structure and make recommendations to the Board on major transactions. During the year M Mostert led all efforts in this regard and was remunerated accordingly. Moreover in compliance with the principles of good governance, the Board took legal advice and established that there was not conflict of interest arising out of his involvement in the transaction evaluated.

242 Notes to the annual financial statements (continued) Rm Rm Rm Related parties Details of material transactions and balances with related parties not disclosed separately in the annual financial statements were as follows: With joint venture: Vodacom Group (Proprietary) Limited Related party balances Trade receivables Dividend receivable 1,400 1,450 1,595 Trade payables (512) (706) (691) Related party transactions Revenue (1,420) (1,510) (1,632) Expenses 2,870 2,974 3,050 Dividend received (2,250) (2,700) (2,970) Audit fees Revenue includes interconnect fees and lease and installation of transmission lines. Expenses mostly represent interconnect expenses. With shareholders: Public Investment Corporation There were no material transactions between the Company and the Public Investment Corporation. Government Related party balances Trade receivables Related party transactions Revenue (2,304) (2,458) (2,623) With subsidiaries: TDS Directory Operations (Proprietary) Limited Related party balances Trade receivables Trade payables (120) (100) (151) Dividend receivable Related party transactions Revenue (57) (57) (59) Expenses Dividend received (143) (149) (120) Swiftnet (Proprietary) Limited Related party balances Trade payables (14) (14) (12) Related party transactions Revenue (14) (16) (18) Income includes data calls and billing fees. Rossal No 65 (Proprietary) Limited Related party balances Accruals and other payables (66) (148) Loan to subsidiary 30 The loan is unsecured, interest free and has no fixed repayment terms. The loan has been subordinated in favour of other creditors. Related party transactions Dividend paid Dividend received (56) (290)

243 Notes to the annual financial statements (continued) 36. Related parties (continued) With subsidiaries: (continued) Acajou Investments (Proprietary) Limited Related party balances Accruals and other payables (100) (98) Related party transactions Dividend paid Dividend received (100) (217) Intekom (Proprietary) Limited Related party balances Accruals and other payables (5) (13) Related party transactions Expenses Q-Trunk (Proprietary) Limited Related party balances Loan to subsidiary Impairment of loan (34) (30) (26) The loan is unsecured, interest free and has no fixed repayment terms. The company has deferred its right to claim or accept payment in favour of all other creditors in the event of the liquidation of the Company or similar event Rm Rm Rm Related party transactions Expenses Special purpose entity cell captive Related party balances Investment (refer to note 11) 1, Related party transactions Investment income (106) (19) Africa Online Limited ( Africa Online ) Related party balances Loan to subsidiary 74 Impairment of investment (12) Trade payables (4) Related party transactions Revenue (4) Investment income (2) The loan is unsecured and bears interest at 3 month USD LIBOR plus 5%. The loan has no fixed repayment terms. Telkom Annual Report Multi-Links Telecommunications Limited Related party balances Loan to subsidiary 840 Trade payables (21) Related party transactions Revenue (21) Investment income (34) The loan is unsecured and bears interest at 3 month USD LIBOR plus 5%. The loan may be prepaid in full or in whole, provided that each part prepayment may not be less than USD1 million. The advances must be repaid on May 01, 2009, July 01, 2009 and January 29, 2010.

244 Notes to the annual financial statements (continued) 36. Related parties (continued) With subsidiaries: (continued) Telkom International (Proprietary) Limited Related party transactions Loan to subsidiary 1,985 The loan has been used to purchase a 75% shareholding in Multi-Links Telecommunications Limited. The loan is unsecured, interest-free and has no fixed repayment terms. Telkom Media (Proprietary) Limited Related party transactions Loan to subsidiary 326 Impairment of loan (217) The loan is interest free and has no repayment terms. Telkom Foundation Related party transactions Expenses With entities under common control: Rm Rm Rm Major public entities Related party balances Trade receivables Trade payables (2) (2) (5) The outstanding balances are unsecured and will be settled in cash in the ordinary course of business. Related party transactions Revenue (362) (400) (485) Expenses Rent received (17) (29) (21) Rent paid Income with major public entities for the year ended March 31, 2007 has been restated due to additional BAN numbers being included in our calculation of income with major public entities. The effect of this is only on the disclosure of the related party note and has a RNil effect on the Company s profit. 350 Key management personnel compensation: (Including directors emoluments) Related party transactions Short-term employee benefits Post-employment benefits Termination benefits Equity compensation benefits The fair value of the shares that vested in the current year is R12 million (2007: Rnil; 2006: R3 million) Terms and conditions of transactions with related parties The sales to and purchases from related parties of telecommunication services are made at arms length prices. Except as indicated above, outstanding balances at the year-end are unsecured, interest free (except for interest charged on overdue telephone accounts) and settlement occurs in cash. Apart from the bank guarantee to the amount not exceeding R23 million (USD3 million) provided to Africa Online, there have been no guarantees provided or received for related party receivables or payables. Except as indicated above for the year ended March 31, 2008, the Company has not made any impairment of amounts owed by related parties (2007: RNil; 2006: RNil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

245 Notes to the annual financial statements (continued) 37. Subsequent events Dividends The Telkom Board declared an annual dividend of R3,437 million or 660 cents per share on June 6, 2008 payable on July 7, 2008 for shareholders registered on July 4, 2008 which will fully utilise the deferred tax asset on STC credits and result in an additional STC charge of R161 million. Telkom Media (Proprietary) Limited ( Telkom Media ) On August 31, 2006 Telkom created a new subsidiary, Telkom Media with a Black Economic Empowerment ( BEE ) shareholding. ICASA awarded Telkom Media a commercial satellite and cable subscription broadcast license on September 12, The BEE shareholders are Videovision Entertainment, MSG Afrika Media and WDB Investment Holdings (Proprietary) Limited. As at March 31, 2008, Telkom had a 75% shareholding in Telkom Media, however, in a recent clarification and refinement of its strategy the board has taken the decision to substantially reduce its investment in Telkom Media and will be investigating all opportunities to do this in the best interests of Telkom shareholders and other stakeholders. Mobile Strategy and unlocking shareholder value Telkom informed the shareholders that on Friday, May 30, 2008, Telkom received a non-binding proposal from a wholly-owned subsidiary of Vodafone Group Plc ( Vodafone ) to acquire a portion of Telkom s stake in Vodacom Group (Proprietary) Limited ( Vodacom ) subject to, inter alia, the Company unbundling its remaining stake in Vodacom to Telkom shareholders. Separately, on Friday, May 30, 2008 Telkom received a letter from a consortium comprising Mvelaphanda Holdings (Proprietary) Limited, affiliated funds of Och-Ziff Capital Management Group and other strategic funders ( the Consortium ), which states that the Consortium is considering making an offer for the entire issued share capital of Telkom. The letter makes it clear that the offer will only be made if a number of pre-conditions are met including, inter alia, confirmation by the Telkom Board that it will unbundle Telkom s entire 50% stake in Vodacom as part of the offer. The discussions with Vodafone are independent from the approach from the Consortium. The Board of Telkom, in accordance with its fiduciary duties, will evaluate all bona fide offers with a view to maximising shareholder value. No transaction will be entered into without requisite shareholder approvals. Telkom will advise shareholders of further developments in this regard in due course. Capability Management Telkom will seek to manage costs by realigning its structure, employees and resources to better match its transforming information, communications and technology business and to improve customer service. The transformation of the communications industry and increasing market and competitive pressure has put communications companies such as Telkom under increasing revenue and expense constraints while being required to improve customer service. As a result a capability management initiative has been launched which is designed to ensure that the capabilities needed to succeed in a converged communications market are established through the optimal utilisation of external as well as internal capabilities, extracting effiencencies, where possible, through scale of a rapidly maturing retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market. The capability management initiative includes the internal consolidation of certain functional areas and the selection of strategic long-term partners with proven performance for other functional areas. The areas which are expected to be impacted are the call centres, operations, ancillary services, network service providers, network field operations, network core operations, information technology operations and retail outlets. Telkom Management Services On July 2, 2008, Telkom received confirmation from the Companies and Intellectual Property Registration Office ( CIPRO ) for the approval and reservation of a newly set-up company. The approved and reserved name is Telkom Management Services. Union action Telkom have recieved a notice from CWU advising Telkom of its intention to embark on some unspecified industrial action. Other matters The directors are not aware of any other matter or circumstance since the financial year ended March 31, 2008 and the date of this report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Company and the results of its operations. Telkom Annual Report

246 Supplementary information Year ended March 31, In connection with the US Securities Exchange Commission Rules relating to Conditions for use of Non-GAAP Financial Measures, EBITDA and headline earnings have been reconciled to net profit below: EBITDA Earnings before interest, taxation, depreciation and amortisation (EBITDA) can be reconciled as follows: EBITDA 20,553 19,785 20,612 Depreciation, amortisation, impairment and write-offs (5,876) (5,315) (6,130) Investment income Finance charges (1,223) (1,125) (1,803) Taxation (4,523) (4,731) (4,704) Minority interests (139) (203) (197) Net profit 9,189 8,646 7,975 Headline earnings The disclosure of headline earnings is a requirement of the JSE Securities Exchange, South Africa and is not a recognised measure under US GAAP Headline earnings can be reconciled as follows: Earnings as reported 9,189 8,646 7,975 Profit on disposal of investment (163) (52) (4) Profit on disposal of property, plant and equipment and intangible assets (79) (29) (147) Impairment/(reversal of impairment) of property, plant and equipment and intangible assets (26) Write-offs of property, plant and equipment Acquisition of subsidiary (35) Tax and minority interest effects 23 (62) (22) Headline earnings 9,097 8,799 8,331 We believe that EBITDA provides meaningful additional information to investors since it is widely acceptable by analysts and investors as a basis for comparing a company s underlying operating profitability with that of other companies as it is not influenced by past capital expenditures or business acquisitions, a company s capital structure or the relevant tax regime. EBITDA is not a US GAAP or IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from operating activities determined in accordance with US GAAP or IFRS or as a measure of liquidity. US DOLLAR CONVENIENCE March 31, 2008 March 31, Operating revenue 6,915 Operating profits 1,779 Net profit 980 EBITDA 2,532 EPS (cents) Net debt 2,041 Total assets 8,645 Cash flow from operating activities 1,267 Cash flow used in investing activities (1,733) Cash flow used in financing activities 362 Exchange rate Period end 1 US$1 = ZAR Noon buying rate.

247 Retaining Telkom s critical skills is a vital element in building for a converged future. Our employees are the key to our success Shareholder analysis 354 Definitions 356 Shareholder information Shareholder information

248 Shareholder analysis at March 31, 2008 Number of Number of of shareholders % shares % Range of shareholders shares 65, ,196, shares 23, ,274, shares 1, ,292, shares ,732, shares ,376, shares ,814, and more shares ,540, Type of shareholder 90, ,228, Banks ,403, Close corporations , Empowerment ,467, Endowment funds , Individuals 86, ,969, Insurance companies ,603, Investment companies ,733, Medical aid schemes , Mutual funds ,427, Nominees and trusts 2, ,289, Other corporations (including the Government of the Republic of South Africa) ,475, Own holdings ,786, Pension funds ,598, Private companies , Public companies , Share trusts , , ,228, Geographical holdings by owner South Africa 90, ,288, United States ,311, United Kingdom ,674, Europe ,282, Other ,672, , ,228, Public and non-public shareholders Non-public shareholders ,328, The Government of the Republic of South Africa ,038, Empowerment ,467, Government buffer account , Diabo share trust , Telkom Treasury Stock (Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited) ,786, Executive and Non-executive directors* , Subsidiaries directors* , Public shareholders Institutional and retail investors 90, ,900, , ,228,

249 Shareholder analysis (continued) Beneficial shareholders of more than 2% The Government of the Republic of South Africa 207,038, Public Investment Corporation 80,002, Elephant Consortium NewShelf 772 (Proprietary) Limited 30,467, Liberty Group 15,574, Sanlam 11,408, Telkom Treasury Stock (Acajou Investments) 10,849, Telkom Treasury Stock (Rossal No 65 (Proprietary) Limited) 10,493, *Director holdings consists of direct and indirect holdings. The information above is based on registered shareholders, except where only beneficial shareholders information was available. Number of shares % 365,833, Telkom Annual Report

250 Definitions 356 3G The generic term, 3G, is used to denote the next generation of mobile systems designed to support high-speed data transmission (144 Kbps and higher) and Internet Protocol (IP)-based services in fixed, portable and mobile environments. As envisaged by the ITU, the 3G system will integrate different service coverage zones and be a global platform and the necessary infrastructure for the distribution of converged service, whether mobile or fixed, voice or data, telecommunications, content or computing. ADSL (Asymmetrical Digital Subscriber Line) ADSL is a broadband access standard which uses existing copper lines to offer high-speed digital connections over the local loop. ADSL transmits data asymmetrically, meaning that the bandwidth usage is much higher in one direction than the other. ADSL provides greater bandwidth from the exchange to the customer (ie. downloading) than from the customer to the exchange (ie. sending). ARPU Vodacom s average monthly revenue per customer, or ARPU, is calculated by dividing the average monthly revenue during the period by the average monthly total reported customer base during the period. ARPU excludes revenue from equipment sales, other sales and services and revenue from national and international users roaming on Vodacom s networks. ATM (Asynchronous Transfer Mode) ATM is a high-speed Wide Area Network (WAN), connection-oriented, packet-switching data communications protocol that allows voice, data and video to be delivered across existing local and Wide Area Networks. ATM divides data into cells and can handle data traffic in bursts. It is asynchronous, in that the stream of cells from one particular user is not necessarily continuous. Bandwidth Bandwidth is a measure of the quantity of signals that can travel over a transmission medium such as copper or a glass fibre strand. It is the available space available to carry a signal. The greater the bandwidth, the greater the information carrying capacity. Bandwidth is measured in bits per second. Broadband Broadband is a method of measuring the capacity of different types of transmission. Digital bandwidth is measured in the rate of bits transmitted per second (bps). For example, an individual ISDN channel has a bandwidth of 64 kilobits per second (Kbps), meaning that it transmits 64,000 bits (digital signals) every second. CAGR Compound Annual Growth Rate. Carrier pre-selection Carrier pre-selection is usually initiated by the telecoms Regulator. It enables individuals to choose which telecom will carry their traffic (mainly long distance) by a signalling contract rather than having to dial extra digits. CDMA (Code Division Multiple Access) CDMA is one of many technologies for digital transmission of radio signals between, for example, mobile telephones and radio base stations. In CDMA, which is a spread-spectrum modulation technology, each call is assigned a unique pseudorandom sequence of frequency shifts that serve as a code to distinguish it. The mobile phone is then instructed to decipher only a particular code to pluck, as it were, the right conversation off the air. CDMA is the technology of choice for 3G mobile systems. CDMA, however, also refers to a particular air-interface standard (a fact that is often a source of confusion). Circuit A circuit is a connection or line between two points. This connection can be made through various media, including copper, coaxial cable, fibre or microwave. A telephone exchange is a circuit switch. DECT (Digital Enhanced Cordless Telecommunications) DECT is the standard for cordless telephones. DECT phones communicate using the PSTN (public switched telephone network) through a small base station in the home or office and have a working radius of between 50 and 300 metres. EBITDA EBITDA represents profit for the year before taxation, finance charges, investment income and depreciation, amortisation, impairment and write-offs. EDGE (Enhanced Data for GSM evolution) EDGE is a technology designed to enhance GSM and TDMA systems with respect to data rates and is widely considered to be the GSM evolution beyond GPRS. It enhances the data capabilities of GSM and TDMA systems by altering the RF modulation scheme to allow greater data rates per time slot. Because it uses a different modulation technique across the air-interface, EDGE requires different mobile terminals/ handsets than those designed for the GSM air-interface. Effective tax rate The effective tax rate is the tax charge in the income statement divided by pre-tax profit. Ethernet Ethernet is a protocol that defines how data is transmitted to and received from LANs. It is the most prevalent LAN protocol, with speeds of up to 10 Mbps. Fibre optics Fibre optics is where messages or signals are sent via light rather than electrical signals down a very thin strand of glass. Light transmission enables much higher data rates than conventional wire, coaxial cable and many forms of radio. Signals travel at the speed of light and do not generate nor are subject to interference. Fibre rings Fibre rings have come to be used in many fibre networks as it provides more network resiliency: if there is a failure along a route and a ring is broken, the direction of the traffic can be reversed and the traffic will still reach its final destination. Fixed access lines Fixed access lines are comprised of public switched telecommunications network lines, or PSTN lines, including integrated services digital network channels, or ISDN channels, and public and private payphones, but excluding internal lines in service. Fixed access lines per employee To calculate the number of access lines per employee the total number of access lines is divided by the number of employees at the end of the period.

251 Definitions (continued) Fixed-line penetration Fixed-line penetration or teledensity is based on the total number of telephone lines in service at the end of the period per 100 persons in the population of South Africa. Population is the estimated South African population at the mid-year in the periods indicated as published by Statistics South Africa, a South African Government department. Fixed-line traffic Fixed-line traffic, other than international outgoing mobile traffic, international interconnection traffic and international Voice over Internet Protocol traffic, is calculated by dividing traffic operating revenue for the particular category by the weighted average tariff for such category during the relevant period. Fixed-line international outgoing mobile traffic and international interconnection traffic are based on the traffic registered through the respective exchanges and reflected in international interconnection invoices. International Voice over Internet Protocol traffic is based on the traffic reflected in invoices. Frame relay Frame relay is a widely implemented telecommunications service designed for cost-efficient data transmission for data traffic between local area networks and between end-points in a wide area network. The network effectively provides a permanent circuit, which means that the customer sees a continuous, dedicated connection, but does not pay for a full-time leased line. GPRS (General Packet Radio Service) GPRS is a packet rather than a circuit-based technology. GPRS allows for faster data transmission speed to both GSM and TDMA (IS-136) networks. GPRS is a packet-switched technology that overlays the circuit-switched GSM network. The service can be introduced to cellular networks by infrastructure. GSM (Global System for Mobile) GSM is a second generation digital mobile cellular technology using a combination of frequency division multiple access (FDMA) and time division multiple access (TDMA). GSM operates in several frequency bands: 400 MHz, 900 MHz and 1800 MHz. On the TDMA side, there are eight timeslots or channels carrying calls, which operate on the same frequency. Unlike other cellular systems, GSM provides a high degree of security by using subscriber identity module (SIM) cards and GSM encryption. HSDPA High Speed Downlink Packet Access. IAS International Accounting Standards. IFRS International Financial Reporting Standards. Interconnection Interconnection refers to the joining of two or more networks. Networks need to interconnect to enable traffic to be transmitted to and from destinations. The amounts paid and received by the operators vary according to distance, time, the direction of traffic, and the type of networks involved. Interest cover Interest cover is calculated by dividing EBIT by the net interest charge in the income statement. It is a measure of income gearing. ISDN (Integrated Services Digital Network) ISDN is a data communications standard used to transmit digital signals over ordinary copper telephone cables. This is one technology for overcoming the last mile of copper cables from the local exchange to the subscribers premises, which has proved a bottleneck for Internet access, for example. ISDN allows to carry voice and data simultaneously, in each of at least two channels capable of carrying 64 Kbps. It provides up to 128 Kbps and a total capacity of 144 Kbps exist. ITU (International Telecommunications Union) ITU is the global technical standard-setting body for telecommunications services. LAN (Local Area Network) A LAN is a group of devices that communicate with each other within a limited geographic area, such as an office. Leased line A leased line is a telecommunications transmission circuit that is reserved by a communications provider for the private use of a customer. LIBOR London Interbank Offer Rate. Local loop The local loop is the final connection between the exchange and the home or office. It is also known as the last mile. Microwave Microwave is radio transmission using very short wavelengths. MMS (Multimedia Messaging Services) MMS is a service developed jointly together with 3GPP, allows users to combine sounds with images and text when sending messages, much like the text-only SMS. Mobile churn Vodacom s churn is calculated by dividing the average monthly number of disconnections during the period by the average monthly total reported customer base during the period. Mobile penetration Vodacom calculates penetration, or teledensity, based on the total number of customers at the end of the period per 100 persons in the population of South Africa. Population is the estimated South African population at the mid-year in the periods indicated as published by Statistics South Africa, a South African Governmental department. Mobile traffic Vodacom s traffic comprises total traffic registered on Vodacom s network, including bundled minutes, outgoing international roaming calls and calls to free services, but excluding national and incoming international roaming calls. Telkom Annual Report

252 Definitions (continued) 358 MOU (Mobile Minutes of Use) Vodacom s average monthly minutes of use per customer, or average MOU, is calculated by dividing the average monthly minutes during the period by the average monthly total reported customer base during the period. MOU excludes calls to free services, bundled minutes and data minutes. Net debt Net debt is all interest-bearing debt finance (long-term and short-term) less cash and marketable securities. Net debt to total equity Net debt to total equity is a measure of book leverage (gearing): net debt in the balance sheet divided by total equity (the sum of shareholders funds plus minority interests). Operating free cash flow Operating free cash flow is defined as cash flow from operating activities, after interest and taxation, before dividends paid, less cash flow from investing activities. Packet switching Packet switching is designed specifically for data traffic, as it cuts the information up into small packets, which are each sent across the network separately and are then reassembled at the final destination. This allows more users to share a given amount of bandwidth. X.25, ATM and frame relay are all packet switching techniques. POP (Point of Presence) A POP is a service provider s location for connecting to users. Generally, POPs refer to the location where people can dial into the provider s computer. Most providers have several POPs to allow low-cost local access via telephone lines. PSTN (Public Switched Telephone Network) The PSTN is a collection of interconnected voice telephone networks, either for a given country or the whole world. It is the sum of the parts. It was originally entirely analog, but now increasingly digital (indeed in many developed countries digitisation has reached 100%), these networks can be either state-owned or commercially owned. PSTN is distinct from closed private networks (although these may interconnect to the PSTN) and from public data networks (PDN). Revenue per fixed access line Revenue per fixed access line is calculated by dividing total fixed-line revenue during the period, excluding data and directories and other revenue, by the average number of fixed access lines during the period. RICA Regulation of Interception of Communication and Provision of Communicationrelated Information Act. ROA (Return on Assets) Return on Assets is calculated by dividing net profit (annualised) by total assets. ROE (Return on Equity) Return on Equity is calculated by dividing net income by the average of the shareholders funds. SDH (Synchronous Digital Hierarchy) SDH is used in most modern systems, where multimedia can be transmitted at high speeds. The networks are shaped in a ring, so that if there is a problem, the traffic can be redirected in the other direction and the caller will not detect the interruption. SMS (Short Message Service) SMS refers to short, usually text-based messages sent by or to a wireless subscriber. They are not delivered to the recipient instantly and have some degree of transmission time delay. SMS messages are usually limited to total character lengths of 140 to 160 characters. Switch A switch is a computer that acts as a conduit and director of traffic. It is a means of sharing resources as a network. Total interest-bearing debt Total interest-bearing debt is defined as short- and long-term interestbearing debt, including credit facilities, finance leases and other financial liabilities. UMTS (Universal Mobile Telecommunications System) UMTS is the Western European name for the 3G WCDMA standard adopted as an evolutionary path by the GSM world. However, it utilises the radio spectrum in a fundamentally different manner than GSM. UMTS is based on DCMA technology and the GSM standard is based on TDMA technology. VoIP (Voice over Internet Protocol) Voice over Internet Protocol is a protocol enabling voice calls to be made over the Internet. Rather than a dedicated circuit being set up between the caller and receiver, as with ordinary phone calls, the voice conversation is digitised and transmitted over Internet Protocol using packet-switched data networks. WAN (Wide Area Network) A WAN comprises LANs in different geographic locations that are connected, often over the public network. WAP (Wireless Application Protocol) WAP is an application environment designed to bridge the gap between the mobile and Internet worlds. It is a set of communication protocols for wireless devices designed to provide vendor-neutral and technologyneutral access to the Internet and advanced telecommunications services. WiMAX WiMAX is a standard for extending broadband wireless access to new locations and over longer distances. The technology is expected to enable multimedia applications with wireless connectivity and typically with a range of up to 30 km. It is a standard for fixed wireless access with substantially higher bandwidth capabilities than cellular networks. The emergence of further enhancements to the standard wil enable nomadic data communications accross an entire metropolitan area network linking homes and businesses to the core telecommunications network. WiMAX can be viewed as a technology complementing existing ADSL broadband offerings.

253 Special note regarding forward-looking statements Many of the statements included in this annual report, as well as oral statements that may be made by us or by officers, directors or employees acting on behalf of us, constitute or are based on forward looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, specifically Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, including, among others, statements regarding our mobile and other strategies, future financial position and plans, objectives, capital expenditures, projected costs and anticipated cost savings and financing plans, as well as projected levels of growth in the communications market, are forward looking statements. Forward looking statements can generally be identified by the use of terminology such as may, will, should, expect, envisage, intend, plan, project, estimate, anticipate, believe, hope, can, is designed to or similar phrases, although the absence of such words does not necessarily mean that a statement is not forward looking. These forward looking statements involve a number of known and unknown risks, uncertainties and other factors that could cause our actual results and outcomes to be materially different from historical results or from any future results expressed or implied by such forward looking statements. Among the factors that could cause our actual results or outcomes to differ materially from our expectations are those risks identified in Item 3. Key Information Risk Factors of Telkom s most recent annual report on Form 20F filed with the US Securities and Exchange Commission and its other filings and submissions with the SEC which are available on Telkom s website at including, but not limited to, any changes to our mobile strategy and Vodacom holdings and our ability to successfully implement such strategy and organisational changes thereto, increased competition in the South African fixed-line, mobile and data communications markets; our ability to implement our strategy of transforming from basic voice and data connectivity to fully converged solutions, developments in the regulatory environment; continued mobile growth and reductions in Vodacom s and Telkom s net interconnect margins; Telkom s and Vodacom s ability to expand their operations and make investments and acquisitions in other African countries and the general economic, political, social and legal conditions in South Africa and in other countries where Telkom and Vodacom invest; our ability to improve and maintain our management information and other systems; our ability to attract and retain key personnel and partners; our inability to appoint a majority of Vodacom s directors and the consensus approval rights at Vodacom may limit our flexibility and ability to implement our preferred strategies; Vodacom s continued payment of dividends or distributions to us; our negative working capital; changes in technology and delays in the implementation of new technologies; our ability to reduce theft, vandalism, network and payphone fraud and lost revenue to non-licensed operators; the amount of damages Telkom is ultimately required to pay to Telcordia Technologies Incorporated; the outcome of regulatory, legal and arbitration proceedings, including tariff approvals, and the outcome of Telkom s hearings before the Competition Commission and others; any requirements that we unbundle the local loop, our ability to negotiate favourable terms, rates and conditions for the provision of interconnection services and facilities leasing services or if ICASA finds that we or Vodacom have significant market power or otherwise imposes unfavourable terms and conditions on us; our ability to implement and recover the substantial capital and operational costs associated with carrier preselection, number portability and the monitoring, interception and customer registration requirements contained in the South African Regulation of Interception of Communications and Provisions of Communication-Related Information Act and the impact of these requirements on our business; Telkom s ability to comply with the South African Public Finance Management Act and South African Public Audit Act and the impact of the Municipal Property Rates Act; fluctuations in the value of the Rand and inflation rates; the impact of unemployment, poverty, crime, HIV infection, labour laws and labour relations, exchange control restrictions and power outages in South Africa; and other matters not yet known to us or not currently considered material by us. We caution you not to place undue reliance on these forward looking statements. All written and oral forward looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Moreover, unless we are required by law to update these statements, we will not necessarily update any of these statements after the date of this annual report, either to conform them to actual results or to changes in our expectations. Telkom Annual Report

254 Administration 360 Company registration number 1991/005476/06 Head office Telkom Towers North 152 Proes Street Pretoria 0002 Postal address Telkom SA Limited Private Bag X881 Pretoria 0001 Telkom share register helpline Customer call centre Company secretary Sandi Linford Tel: Media relations Pynee Chetty Tel: United States ADR depositary The Bank of New York Shareholder Relations Department PO Box New York NY Tel: Corporate Communications Nabinto Petsana Tel: Regulatory and Public Policy Adv. Ouma Rasethaba Tel: Auditors Ernst & Young Inc. Wanderers Office Park 52 Corlett Drive Illovo 2196 Private Bag X14 Northlands 2116 Tel: Fax: Transfer agents Computershare Investor Services 2004 (Pty) Ltd 70 Marshall Street Johannesburg, 2001 PO Box Marshalltown 2107 Business call centre Investor Relations Nicola White Tel: Sponsors UBS Securities South Africa (Pty) Limited 64 Wierda Road East Wierda valley Sandton 2196

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